WASHINGTON (AP) - President Barack Obama's ambitious goal of cutting the federal deficit in half relies on a perfect - some might say improbable - convergence of factors: a recovered economy, a tax boost for the rich and success in easing foreign entanglements.In calling for a deficit of about $530 billion in four years, Obama has established a marker by which to measure his first-term performance as president. The dollar figure could be his albatross or his badge of success."This will not be easy," Obama said Monday as he kicked off a fiscal summit at the White House. "It will require us to make difficult decisions and face challenges we've long neglected."For Obama, the challenge is clear: He will have to increase spending on health care and energy if he wants to accomplish the policy overhaul he promised during his campaign, yet he also needs to cut spending elsewhere and increase revenue to meet his deficit goal.All this, even as he employs accounting practices he says will more honestly depict the size of the federal budget.For him to succeed, the economy will have to meet current forecasts that it will begin to turn around gradually during the second half of the year. Even so, Obama might still have to seek billions more to help rescue the beleaguered financial sector.Administration officials say Obama will also achieve budget reductions through lower spending on the war in Iraq. However, it is unclear how much of those savings he will then devote to Afghanistan, where he already has agreed to boost troop strength.Further budget assistance would come from increases in taxes for wealthier Americans. Administration officials have said Obama will meet his campaign pledge to end President George W. Bush's tax cuts for people who make more than $250,000. Those tax cuts are to expire at the end of 2010.Obama plans other tax cuts for most Americans, but any tax hike is likely to meet stiff resistance from congressional Republicans. And if the economy has not improved, there will be pressure on him not to raise taxes on any segment of the population, no matter how rich.Such a discussion about taxes would be especially charged in the middle of the 2010 midterm elections.What's more, banks are paying dividends on the assets that the government purchased in its rescue effort. The government could see a return on its investment in later years if banks can buy those assets back. The government experienced a similar increase in spending in the 1990s when the Resolution Trust Corp. bailed out the savings and loan industry. Eventually the government got its money back and more, contributing to the low deficits of the era."A lot of things have to go right between now and then," Mark Zandi, chief economist for Moody's Economy.com, said in an interview before he addressed the White House summit. "The policy response to the crisis has to work for the budget to stick to the script."Administration aides say they inherited a budget deficit of $1.3 trillion and project the deficit to grow to $1.5 trillion by Sept. 30, the end of the current fiscal year. But much of that is emergency spending designed to contain the economic crisis and assist banking institutions. Once that spending stops, the deficit will shrink on its own.In fact, if the $787 billion economic stimulus package recently signed into law and the government's other billions spent on mortgages and banks amounted to the only additional spending undertaken between now and 2013, the deficit would be likely to dip in four years to a sum lower than Obama's goal."So the question is really can they do that (reduce the deficit) as well as implement the agenda that he was elected on," said William Gale, director of economic studies at the Brookings Institution.Obama's target would place the deficit at about 3 percent of gross domestic product. The GDP is a measure of a country's economic activity and many economists say deficits during a stable economy should amount to no more than 2 to 2.5 percent. At $1.5 trillion, the deficit would hit a whopping 10.6 percent of GDP this year.Obama's 3 percent goal would still only lower deficits to ranges similar to those under Bush. Zandi said the key is whether the deficits are on a falling pathThe president is also counting on achieving his deficit target by reducing wasteful programs - a perennially elusive aim of many an administration. For instance, he said he wants to halt federal support for huge agriculture companies that don't need the help. He also would end tax breaks for companies shipping jobs abroad. Yet, such companies have staunch defenders in Congress who have fought off similar efforts in the past.Obama also said Monday he would return to the pay-as-you-go rule the government used in the 1990s to help control federal deficits. Back then, the law required that any tax cut or increase in federal benefits like Medicare had to be paid for with a tax increase or spending reduction elsewhere in the budget.Obama's embrace of that rule will take effect after enactment of the recent stimulus package.The stimulus law includes language preventing the alternative minimum tax from raising levies on millions of middle-class families this year. If the pay-as-you-go rules were applied to that tax provision, it would have forced Obama and Congress to find $70 billion in savings to pay for it - an exercise none of them would have enjoyed.---Associated Press Writer Alan Fram contributed to this article.

Dr Paul to Introduce Legislation to Audit the Federal Reserve Good news indeed - could the audit lead to an investigation under the ominous RICO laws? The private Federal Reserve cabal holds a monopoly to issue our currency and to secretly (behind closed doors) control our monetary policy - no wonder we're bankrupt!

Any nation that outsources its most important financial power and responsibility to private banks relinquishes its sovereignty; effectively becoming a client state. A blatant conflict of interests exists; they are choosing who is saved first - the people or the banks. They are THE bankers that are being saved and not surprisingly, we're paying the bill.

It's encouraging to finally see someone step forward to try and end the madness.

The Federal Reserve controls the flow of money and credit in our economy because Congress has abdicated its responsibility over the nation's currency. This process therefore occurs centrally, and almost completely outside the system of checks and balances. Because of legal tender laws, people are left with no real choice, except to build their lives and futures around this monopoly currency, vulnerable to powerful central bankers. The Founding Fathers intended only gold and silver to be used as currency, however, inch by inch over the decades, this country has backed away from this important restraint. Our money today has no link whatsoever to gold or silver. For many reasons, this is extremely dangerous, and has a lot to do with the boom and bust cycles that have resulted in the crisis in which we find ourselves today.

The Fed is now pledging to reveal to the public more about its economic predictions, and calls this greater transparency. This is little more than window-dressing, at best, utterly useless at worst. Many analysts, especially those familiar with the Austrian school of economics, saw the current economic crisis coming years ago when the Federal Reserve was still telling the American people their policies were as good as gold. So while it might be nice to know what fantasy-infused outlook the Fed has on the economy, I am much more interested in what they are doing as a result of their faulty, haphazard interpretation of data. For instance, what arrangements do they have with other foreign central banks? What the Fed does on that front could very well affect or undermine foreign policy, or even contribute to starting a war.

We also need to know the source and destination of funds provided through the Fed's emergency funding facilities. Information such as this will provide a more accurate and complete picture of the true cost of these endless bailouts and spending packages, and could very likely affect the decisions being made in Congress. But with so much of the Fed's business cloaked in secrecy, these latest initiatives will not even scratch the surface of the Fed's opaque operations. People are demanding answers and explanations for our economic malaise, and we should settle for nothing less than the whole truth on monetary policy.

The first step is to pass legislation I will soon introduce requiring an audit of the Federal Reserve so we can at least get an accurate picture of what is happening with our money. If this audit reveals what I suspect, and Congress has finally had enough, they can also pass my legislation to abolish the Federal Reserve and put control of the economy's lifeblood, the currency, back where it Constitutionally belongs. If Congress refuses to do these two things, the very least they could do is repeal legal tender laws and allow people to choose a different currency in which to operate. If the Fed refuses to open its books to an audit, and Congress refuses to demand this, the people should not be subject to the whims of this secretive and incompetent organization.

Judged by his own standards, President Obama's $787 billion economic stimulus program is deeply disappointing. For weeks, Obama has described the economy in grim terms. "This is not your ordinary run-of-the-mill recession," he said at his Feb. 9 news conference. It's "the worst economic crisis since the Great Depression." Given these dire warnings, you'd expect the stimulus package to focus almost exclusively on reviving the economy. It doesn't, and for that, Obama bears much of the blame.

The case for a huge stimulus -- which I support -- is to prevent a devastating downward economic spiral. Spending is tumbling worldwide. In the fourth quarter of 2008, the U.S. economy contracted at a nearly 4 percent annual rate. In Japan, the economy fell at a nearly 13 percent rate; in Europe, the rate was about 6 percent. These are gruesome declines. If the economic outlook is as bleak as Obama says, there's no reason to dilute the upfront power of the stimulus. But that's what he's done.

His politics compromise the program's economics. Look at the numbers. The Congressional Budget Office (CBO) estimates that about $200 billion will be spent in 2011 or later -- after it would do the most good. For starters, there's $8 billion for high-speed rail. "Everyone is saying this is [for] high-speed rail between Los Angeles and Las Vegas -- I don't know," says Ray Scheppach, executive director of the National Governors Association. Whatever's done, the design and construction will occupy many years. It's not a quick stimulus.

Then there's $20.8 billion for improved health information technology -- more electronic records and the like. Probably most people regard this as desirable, but here, too, changes occur slowly. The CBO expects only 3 percent of the money ($595 million) to be spent in fiscal 2009 and 2010. The peak year of projected spending is 2014 at $14.2 billion.

Big projects take time. They're included in the stimulus because Obama and Democratic congressional leaders are using the legislation to advance many political priorities instead of just spurring the economy. At his news conference, Obama argued (inaccurately) that the two goals don't conflict. Consider, he said, the retrofitting of federal buildings to make them more energy efficient. "We're creating jobs immediately," he said.

Yes -- but not many. The stimulus package includes $5.5 billion for overhauling federal buildings. The CBO estimates that only 23 percent of that would be spent in 2009 and 2010.

Worse, the economic impact of the stimulus is already smaller than advertised. The package includes an obscure tax provision: a "patch" for the alternative minimum tax (AMT). This protects many middle-class Americans against higher taxes and, on paper, adds $85 billion of "stimulus" in 2009 and 2010. One problem: "It's not stimulus," says Len Burman of the nonpartisan Tax Policy Center. Congress was "going to do it anyway. They do it every year." Strip out the AMT patch, and the stimulus drops to about $700 billion, with almost 30 percent spent after 2010.

The purpose of the stimulus is to keep declines in one part of the economy from dragging down other sectors. The next big vulnerable sector seems to be state and local governments. Weakening tax payments create massive budget shortfalls. From now until the end of fiscal 2011, these may total $350 billion, says the Center on Budget and Policy Priorities (CBPP), a liberal advocacy group. Required to balance their budgets, states face huge pressures to cut spending and jobs or to raise taxes. All would worsen the recession and deepen pessimism.

Yet, the stimulus package offers only modest relief. Using funds from the stimulus, states might offset 40 percent of their looming deficits, says the CBPP's Nicholas Johnson. The effect on localities would probably be less. Congress might have done more by providing large, temporary block grants to states and localities and letting them decide how to spend the money. Instead, the stimulus provides most funds through specific programs. There's $90 billion more for Medicaid, $12 billion for special education, $2.8 billion for various policing programs. More power is being centralized in Washington.

No one knows the economic effects of all this; estimates vary. But Obama's political strategy stunts the impact from what it might have been. By using the stimulus for unrelated policy goals, spending will be delayed and diluted. There's another downside: "Temporary" spending increases for specific programs, as opposed to block grants, will be harder to undo, worsening the long-term budget outlook.

Politics cannot be removed from the political process. But here, partisan politics ran roughshod over pragmatic economic policy. Token concessions (including the AMT provision) to some Republicans weakened the package. Obama is gambling that his flawed stimulus will seem to work well enough that he'll receive credit for restarting the economy -- and not be blamed for engineering a colossal waste.

California: A Casualty of the Left By Dennis PragerFrontPageMagazine.com | Tuesday, February 24, 2009

Virtually throughout its history, and certainly in the 20th century, California has been known as the place to go for dynamism and growth. It did not become the richest, most populous, and most productive state solely because of its weather and natural resources.

So it takes a lot to turn California around from growth to contraction, from people moving into the state to a net exodus from the state, from business moving into California to businesses leaving California.

It takes some doing.

And the Left has done it.

California’s Democratic legislature has been more or less able to do whatever it wants with California. The Wall Street Journal has described the result:

“The Golden State -- which a decade ago was the booming technology capital of the world -- has been done in by two decades of chronic overspending, overregulating and a hyperprogressive tax code.…”

One might argue that’s this is a politically biased assessment. So here are some facts, not assessments:California’s state expenditures grew from $104 billion in 2003 to $145 billion in 2008.California has the worst credit rating in the nation.California has the fourth highest unemployment rate in the nation, 9.3 percent -- higher even than the car manufacturing state of Michigan.California has the second highest home foreclosure rate.California’s tax-paying middle class is leaving the state. California’s net loss last year in state-to-state migration exceeded every other state's. New York, another Left-run state, was second.Since 2000, California’s job growth rate -- which in the late 1970s was many times higher than the national average -- has lagged behind the national average by almost 20 percent.California has lost 25 percent of its industrial work force since 2001.Joel Kotkin, one of the leading observers of urban America, the presidential fellow in urban futures at Chapman University, recently wrote an essay on California, “Sundown for California.” He begins with these words:

“Twenty-five years ago, along with another young journalist, I co-authored a book called “California, Inc.” about our adopted home state. The book described ‘California’s rise to economic, political, and cultural ascendancy’...But today our Golden State appears headed, if not for imminent disaster, then toward an unanticipated, maddening, and largely unnecessary mediocrity.”

That is what left-wing policies have done to California. In Kotkin’s words, “the state legislature decided to spend its money on public employees and impose ever more regulatory burdens on business.”

Last week, Intel, the world’s largest maker of computer chips, announced that it would invest $7 billion to expand its facilities. Where? In Arizona, Oregon, and New Mexico. But not in California, the state in which Intel is headquartered.

The Left is bringing the greatest state to its knees.

What generations created, the Left destroys. There are few productive and noble institutions in America that the Left has not hurt or attempted to hurt. But while the Left destroys a great deal, it constructs almost nothing (outside of government agencies, laws, and lawsuits).

Take the Boy Scouts. For generations, the Boy Scouts, founded and preserved by Americans of all political as well as ethnic backgrounds, has helped millions of American boys become good, productive men. The Left throughout America -- its politicians, its media, its stars, its academics -- have ganged up to deprive the Boy Scouts of oxygen. Everywhere possible, the Boy Scouts are vilified and deprived of places to meet.

But while the Left works to destroy the Boy Scouts -- unless the Boy Scouts adopt the Left’s views on openly gay scouts and scout leaders -- the Left has created nothing comparable to the Boy Scouts. The Left tries to destroy one of the greatest institutions ever made for boys, but it has built nothing for boys. There is no ACLU version of the Boy Scouts; there is only the ACLU versus the Boy Scouts.

The same holds true for the greatest character-building institution in American life: Judeo-Christian religions. Once again, the Left knows how to destroy. Everywhere possible the Left works to inhibit religious institutions and values -- from substituting “Happy Holidays” for “Merry Christmas” to removing the tiny cross from the Los Angeles County Seal to arguing that religious people must not bring their values into the political arena.

And, then there is education. Until the Left took over American public education in the second half of the 20th century, it was generally excellent -- look at the high level of eighth-grade exams from early in the 20th century and you will weep. The more money the Left has gotten for education -- America now spends more per student than any country in the world -- the worse the academic results. And the Left has removed God and dress codes from schools -- with socially disastrous results.

Of course, it is not entirely accurate to say that the Left builds nothing. It has built vast government bureaucracies, MTV, and post-1960s Hollywood, for example. But these are, to say the least, not positive achievements.

In his column this week, Thomas Friedman describes General Motors Corp., as “a giant wealth-destruction machine.” That perfectly describes the Left many times over. It is both a wealth-destruction machine and an ennobling-institution destruction machine.Dennis Prager hosts a nationally syndicated radio talk show based in Los Angeles. He is the author of four books, most recently "Happiness is a Serious Problem" (HarperCollins). His website is www.dennisprager.com. To find out more about Dennis Prager, visit the Creators Syndicate Web page at www.creators.com.

This wisdom from Scott G's site sums up the rationale opposing govt stimulus superbly:

“The usual effect of attempts of government to encourage consumption, is merely to prevent savings; that is, to promote unproductive consumption at the expense of reproductive, and to diminish the national wealth by the very means which were intended to increase it.” - J.S. Mill

"Want to turn things around in a flash? Abolish the capital gains tax" - CD

Yes, but zero chance with the social justice crowd in power. But we should stop taxing the inflation component of the gains and, at the minimum, lock in current rates for today's investors to rely on. Even then you can't undo the panic that was caused by the transfer of power starting in Nov 2006 that promised to punish investors who don't rush to dispose of their assets.

I don't like to see misguided policies confused with criminality. Of course there should be oversight and any criminals jailed but I disagree with the idea that we would be better off if the politicians had even more direct control over the supply of money. I also think it is unrealistic to think that printed dollars will ever again have a direct redemption in gold. Most money and transaction value never sees a printed dollar.

The Fed is about as private as the Supreme Court. The President appoints the Directors, the senate confirms, and the profits all revert to the U.S.Treasury.

You see, the guy who increased spending the fastest ever actually rejected some stuff, so we need half again as much of what we spent already to make sure we can throw money down ratholes all the more quickly. Jesus Freaking Christ.

February 24, 2009House Dems want to spend $410 billion moreYes, but this time, it's for a good cause; to keep the government running. Or maybe it should be members of Congress who should start with the running.

AP reports "House Democrats unveiled a $410 billion spending bill on Monday to keep the government running through the end of the fiscal year, setting up the second political struggle over federal funds in less than a month with Republicans."

Better not read this while eating breakfast. "The measure includes thousands of earmarks, the pet projects favored by lawmakers but often criticized by the public in opinion polls. There was no official total of the bill's earmarks, which accounted for at least $3.8 billion."

That's "thousands" of earmarks. Both Republicans and Democrats.

Not only that, this spending bill represents an 8% increase over last year's outlays. And get this, Democrats say "they were needed to make up for cuts enacted in recent years or proposed a year ago by then-President George W. Bush in health, education, energy and other programs."

That's right. We need to spend around $35 billion more than last year because the man who increased government spending faster and higher than any other president in the history of the United States didn't increase it ENOUGH.

Remind me again why we just spent $800 billion dollars...something about an economic crisis, yes? And yet, our lawmakers pretend that it's business as usual with nauseating amounts of taxdollars just being shoveled out the Capitol window.

My advice: Buy gold, don't panic when inflation spins out of control, and when the market hits bottom, buy like there's no tomorrow.

David Espo, AP Special CorrespondentTuesday February 24, 2009, 8:50 am ESTYahoo! Buzz PrintWASHINGTON (AP) -- House Democrats unveiled a $410 billion spending bill on Monday to keep the government running through the end of the fiscal year, setting up the second political struggle over federal funds in less than a month with Republicans.

The measure includes thousands of earmarks, the pet projects favored by lawmakers but often criticized by the public in opinion polls. There was no official total of the bill's earmarks, which accounted for at least $3.8 billion.

The legislation, which includes an increase of roughly 8 percent over spending in the last fiscal year, is expected to clear the House later in the week.

Democrats defended the spending increases, saying they were needed to make up for cuts enacted in recent years or proposed a year ago by then-President George W. Bush in health, education, energy and other programs.

Republicans countered that the spending in the bill far outpaced inflation, and amounted to much higher increases when combined with spending in the stimulus legislation that President Barack Obama signed last week. In a letter to top Democratic leaders, the GOP leadership called for a spending freeze, a step they said would point toward a "new standard of fiscal discipline."

Either way, the bill advanced less than one week after Obama signed the $787 billion economic stimulus bill that all Republicans in Congress opposed except for three moderate GOP senators.

Apart from spending, the legislation provides Democrats in Congress and Obama an opportunity to reverse Bush-era policy on selected issues.

It loosens restrictions on travel to Cuba, as well as the sale of food and medicine to the communist island-nation.

In another change, the legislation bans Mexican-licensed trucks from operating outside commercial zones along the border with the United States. The Teamsters Union, which supported Obama's election last year, hailed the move.

The Bush administration backed a pilot program to permit up to 500 trucks from 100 Mexican motor carriers access to U.S. roads.

The legislation covers programs for numerous Cabinet-level and other agencies, and takes the place of regular annual spending bills that did not pass last year as a result of a deadlock between the Bush administration and the Democratic-controlled Congress.

Congressional expenses are included. The bill provides $500,000 for what is described as a Senate "pilot program" that will defray the cost of mass mail postcards to households notifying them of a nearby town meeting to be attended by any senator.

Approximately 74.9 percent of the U.S. families surveyed in 2004 had credit cards, and 58 percent of those families carried a balance. In 2001, 76.2 percent of families had creditcards, and 55 percent of those families carried a balance. (Source: Federal Reserve Bulletin, February 2006.) Total U.S. consumer debt (which includes credit card debt and noncredit-card debt but not mortgage debt) reached $2.55 trillion at the end of 2007, up from $2.42 trillion at the end of 2006. (Source: Federal Reserve) After an almost unbroken streak of increases, total U.S. consumer revolving debt fell $973.5 billion in November 2008. About 98 percent of that debt was credit card debt. (Source: Federal Reserve) ________________________________________________________________________________________

43 out 50 states are running budget deficits. 43 out of 57 doesn't sound near as bad though, right Barry?

Holding a "fiscal responsibility summit" at the White House in the middle of a government spending spree is a bit like having an Alcoholics Anonymous meeting at a frat house on homecoming weekend.

This could explain the sparse attendance at yesterday's session. Economic Recovery Advisory Board Chairman Paul Volcker, penciled in to lead the session on taxes, didn't come. Veterans Affairs Secretary Eric Shinseki, listed as a moderator of the health-care panel, was also missing, as was Deputy Defense Secretary William Lynn, who had been tapped as a leader of the procurement session. Another mysterious absence: CIA Director Leon Panetta, the Clinton budget director, who was expected to lead the budget panel.

"It is wonderful to see the speaker here," President Obama said at the start of his remarks. True: House Speaker Nancy Pelosi (D-Calif.) was in the first row, having walked in 10 minutes after the program began.

"And," the president continued, "we've got, uh, our representative -- I don't see Harry here." Also true: Senate Majority Leader Harry Reid (D-Nev.) had another engagement, across town at the Newseum.

The president, assembling the summiteers in the East Room, gave them their orders: "I want you to question each other, challenge each other," he said. "I look forward to hearing the results when you report back."

The participants then filed out into the main foyer of the White House for juice, coffee and piano music. Sen. John Cornyn (Tex.), a member of the Republican leadership, was seen fleeing before the breakout sessions began.

The lawmakers got right to work. In the health-care session, Sen. Arlen Specter (R-Pa.) said he had considered giving up martinis to improve his health but "I was elated when I found it didn't make any difference." Alcohol was also a topic in the budget session, where Rep. David Obey (D-Wis.) proposed that the president solve the problem by locking everybody in a room with three bottles of gin.

When Obama announced the summit last month, it had the sound of something big. But the administration didn't settle on a date until recently, and some participants didn't receive invitations until Friday. According to one report, not denied by the White House, Obama dropped plans to announce a new Social Security task force at the gathering.

There were signs yesterday of the hasty arrangements. In the tax-reform session, Rep. David Price (D-N.C.) arrived to discover that his name tag identified him as Rep. Tom Price (R-Ga.). White House Chief of Staff Rahm Emanuel, listed as one of the moderators of the procurement panel, arrived just 10 minutes before the end.

"Oh, nice of you to join us," said Rep. Darrell Issa (R-Calif.). Emanuel said nothing.

But Emanuel didn't need to say anything. The summit was about symbolism -- conveying the sense that Obama, at a time of fiscal profligacy, cares about fiscal restraint -- and by that measure, it succeeded admirably.

"Today, I'm pledging to cut the deficit we inherited by half by the end of my first term in office," the president told the attendees. This remarkable feat would be made possible only by the fact that the current year's deficit was an eye-popping $1.3 trillion and rising when Obama took over; even half that amount would still be a record.

After two hours away from the cameras in their breakout sessions, the summit-goers rejoined Obama. To nobody's surprise, they announced no major breakthroughs. But, with television cameras rolling, they gave Obama something almost as valuable: lavish praise for the summit. It was "very, very productive" (Rep. Steny Hoyer, D-Md.), "a terrific start in the White House" (Sen. Kent Conrad, D-N.D.), and "all of us are enormously grateful" (Sen. Max Baucus, D-Mont.). Sen. Tom Carper (D-Del.) likened Obama's outreach to the biblical "Parable of the Sower."

Even Republicans gushed. "It's a great opportunity, I think, for us to really come together on some of these very, very big issues," said Rep. Eric Cantor (Va.), the No. 2 House Republican.

A couple of Republicans in the audience needled Obama, but the president, from the stage, easily put down their challenges.

"Your helicopter is now going to cost as much as Air Force One," Sen. John McCain (R-Ariz.) chided.

"The helicopter I have now seems perfectly adequate to me," Obama answered, to laughter. "Of course, I've never had a helicopter before."

Rep. Joe Barton (R-Tex.) complained that Pelosi had shut Republicans out from legislative talks. "This is a good first step," he said of the summit. "But if this is all we do, it's a sterile step."

"The minority has to be constructive," Obama told the congressman, and not "just want to blow the thing up."

For all the no-shows and the lack of planning, the summit had, in the end, provided something of value: a rare, public back-and-forth between the president, lawmakers and interest groups. No doubt some of the no-shows will wish they had been there -- and, luckily, they may get a second chance.

"We've scheduled a health-care summit next week," the president told the summiteers. "Not that I've got summititis here."_______________________________________________________________________________________________________

President Obama's economic recovery package will actually hurt the economy more in the long run than if he were to do nothing, the nonpartisan Congressional Budget Office said Wednesday.

CBO, the official scorekeepers for legislation, said the House and Senate bills will help in the short term but result in so much government debt that within a few years they would crowd out private investment, actually leading to a lower Gross Domestic Product over the next 10 years than if the government had done nothing.

In the mid-'80s, Wall Street turned to the quants—brainy financial engineers—to invent new ways to boost profits. Their methods for minting money worked brilliantly... until one of them devastated the global economy. Photo: Jim Krantz/Gallery Stock Road Map for Financial Recovery: Radical Transparency Now! A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.

For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.

How could one formula pack such a devastating punch? The answer lies in the bond market, the multitrillion-dollar system that allows pension funds, insurance companies, and hedge funds to lend trillions of dollars to companies, countries, and home buyers.

A bond, of course, is just an IOU, a promise to pay back money with interest by certain dates. If a company—say, IBM—borrows money by issuing a bond, investors will look very closely over its accounts to make sure it has the wherewithal to repay them. The higher the perceived risk—and there's always some risk—the higher the interest rate the bond must carry.

Bond investors are very comfortable with the concept of probability. If there's a 1 percent chance of default but they get an extra two percentage points in interest, they're ahead of the game overall—like a casino, which is happy to lose big sums every so often in return for profits most of the time.

Bond investors also invest in pools of hundreds or even thousands of mortgages. The potential sums involved are staggering: Americans now owe more than $11 trillion on their homes. But mortgage pools are messier than most bonds. There's no guaranteed interest rate, since the amount of money homeowners collectively pay back every month is a function of how many have refinanced and how many have defaulted. There's certainly no fixed maturity date: Money shows up in irregular chunks as people pay down their mortgages at unpredictable times—for instance, when they decide to sell their house. And most problematic, there's no easy way to assign a single probability to the chance of default.

Wall Street solved many of these problems through a process called tranching, which divides a pool and allows for the creation of safe bonds with a risk-free triple-A credit rating. Investors in the first tranche, or slice, are first in line to be paid off. Those next in line might get only a double-A credit rating on their tranche of bonds but will be able to charge a higher interest rate for bearing the slightly higher chance of default. And so on.

"...correlation is charlatanism" Photo: AP photo/Richard Drew The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.

But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are.

Investors like risk, as long as they can price it. What they hate is uncertainty—not knowing how big the risk is. As a result, bond investors and mortgage lenders desperately want to be able to measure, model, and price correlation. Before quantitative models came along, the only time investors were comfortable putting their money in mortgage pools was when there was no risk whatsoever—in other words, when the bonds were guaranteed implicitly by the federal government through Fannie Mae or Freddie Mac.

Yet during the '90s, as global markets expanded, there were trillions of new dollars waiting to be put to use lending to borrowers around the world—not just mortgage seekers but also corporations and car buyers and anybody running a balance on their credit card—if only investors could put a number on the correlations between them. The problem is excruciatingly hard, especially when you're talking about thousands of moving parts. Whoever solved it would earn the eternal gratitude of Wall Street and quite possibly the attention of the Nobel committee as well.

To understand the mathematics of correlation better, consider something simple, like a kid in an elementary school: Let's call her Alice. The probability that her parents will get divorced this year is about 5 percent, the risk of her getting head lice is about 5 percent, the chance of her seeing a teacher slip on a banana peel is about 5 percent, and the likelihood of her winning the class spelling bee is about 5 percent. If investors were trading securities based on the chances of those things happening only to Alice, they would all trade at more or less the same price.

But something important happens when we start looking at two kids rather than one—not just Alice but also the girl she sits next to, Britney. If Britney's parents get divorced, what are the chances that Alice's parents will get divorced, too? Still about 5 percent: The correlation there is close to zero. But if Britney gets head lice, the chance that Alice will get head lice is much higher, about 50 percent—which means the correlation is probably up in the 0.5 range. If Britney sees a teacher slip on a banana peel, what is the chance that Alice will see it, too? Very high indeed, since they sit next to each other: It could be as much as 95 percent, which means the correlation is close to 1. And if Britney wins the class spelling bee, the chance of Alice winning it is zero, which means the correlation is negative: -1.

If investors were trading securities based on the chances of these things happening to both Alice and Britney, the prices would be all over the place, because the correlations vary so much.

But it's a very inexact science. Just measuring those initial 5 percent probabilities involves collecting lots of disparate data points and subjecting them to all manner of statistical and error analysis. Trying to assess the conditional probabilities—the chance that Alice will get head lice if Britney gets head lice—is an order of magnitude harder, since those data points are much rarer. As a result of the scarcity of historical data, the errors there are likely to be much greater.

In the world of mortgages, it's harder still. What is the chance that any given home will decline in value? You can look at the past history of housing prices to give you an idea, but surely the nation's macroeconomic situation also plays an important role. And what is the chance that if a home in one state falls in value, a similar home in another state will fall in value as well?

Here's what killed your 401(k) David X. Li's Gaussian copula function as first published in 2000. Investors exploited it as a quick—and fatally flawed—way to assess risk. A shorter version appears on this month's cover of Wired.

ProbabilitySpecifically, this is a joint default probability—the likelihood that any two members of the pool (A and B) will both default. It's what investors are looking for, and the rest of the formula provides the answer. Survival timesThe amount of time between now and when A and B can be expected to default. Li took the idea from a concept in actuarial science that charts what happens to someone's life expectancy when their spouse dies. EqualityA dangerously precise concept, since it leaves no room for error. Clean equations help both quants and their managers forget that the real world contains a surprising amount of uncertainty, fuzziness, and precariousness.

CopulaThis couples (hence the Latinate term copula) the individual probabilities associated with A and B to come up with a single number. Errors here massively increase the risk of the whole equation blowing up. Distribution functionsThe probabilities of how long A and B are likely to survive. Since these are not certainties, they can be dangerous: Small miscalculations may leave you facing much more risk than the formula indicates. GammaThe all-powerful correlation parameter, which reduces correlation to a single constant—something that should be highly improbable, if not impossible. This is the magic number that made Li's copula function irresistible.

Enter Li, a star mathematician who grew up in rural China in the 1960s. He excelled in school and eventually got a master's degree in economics from Nankai University before leaving the country to get an MBA from Laval University in Quebec. That was followed by two more degrees: a master's in actuarial science and a PhD in statistics, both from Ontario's University of Waterloo. In 1997 he landed at Canadian Imperial Bank of Commerce, where his financial career began in earnest; he later moved to Barclays Capital and by 2004 was charged with rebuilding its quantitative analytics team.

Li's trajectory is typical of the quant era, which began in the mid-1980s. Academia could never compete with the enormous salaries that banks and hedge funds were offering. At the same time, legions of math and physics PhDs were required to create, price, and arbitrage Wall Street's ever more complex investment structures.

In 2000, while working at JPMorgan Chase, Li published a paper in The Journal of Fixed Income titled "On Default Correlation: A Copula Function Approach." (In statistics, a copula is used to couple the behavior of two or more variables.) Using some relatively simple math—by Wall Street standards, anyway—Li came up with an ingenious way to model default correlation without even looking at historical default data. Instead, he used market data about the prices of instruments known as credit default swaps.

If you're an investor, you have a choice these days: You can either lend directly to borrowers or sell investors credit default swaps, insurance against those same borrowers defaulting. Either way, you get a regular income stream—interest payments or insurance payments—and either way, if the borrower defaults, you lose a lot of money. The returns on both strategies are nearly identical, but because an unlimited number of credit default swaps can be sold against each borrower, the supply of swaps isn't constrained the way the supply of bonds is, so the CDS market managed to grow extremely rapidly. Though credit default swaps were relatively new when Li's paper came out, they soon became a bigger and more liquid market than the bonds on which they were based.

When the price of a credit default swap goes up, that indicates that default risk has risen. Li's breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market. It's hard to build a historical model to predict Alice's or Britney's behavior, but anybody could see whether the price of credit default swaps on Britney tended to move in the same direction as that on Alice. If it did, then there was a strong correlation between Alice's and Britney's default risks, as priced by the market. Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).

It was a brilliant simplification of an intractable problem. And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.

The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.

As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked. The consequent pools were often known as collateralized debt obligations, or CDOs. You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A. You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared, which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included. But it didn't matter. All you needed was Li's copula function.

The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.

At the heart of it all was Li's formula. When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable. It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.

"The corporate CDO world relied almost exclusively on this copula-based correlation model," says Darrell Duffie, a Stanford University finance professor who served on Moody's Academic Advisory Research Committee. The Gaussian copula soon became such a universally accepted part of the world's financial vocabulary that brokers started quoting prices for bond tranches based on their correlations. "Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus," wrote derivatives guru Janet Tavakoli in 2006.

The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott wrote that "the correlations between financial quantities are notoriously unstable." Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. And he wasn't alone. During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial. Investment banks would regularly phone Stanford's Duffie and ask him to come in and talk to them about exactly what Li's copula was. Every time, he would warn them that it was not suitable for use in risk management or valuation.

David X. Li Illustration: David A. Johnson In hindsight, ignoring those warnings looks foolhardy. But at the time, it was easy. Banks dismissed them, partly because the managers empowered to apply the brakes didn't understand the arguments between various arms of the quant universe. Besides, they were making too much money to stop.

In finance, you can never reduce risk outright; you can only try to set up a market in which people who don't want risk sell it to those who do. But in the CDO market, people used the Gaussian copula model to convince themselves they didn't have any risk at all, when in fact they just didn't have any risk 99 percent of the time. The other 1 percent of the time they blew up. Those explosions may have been rare, but they could destroy all previous gains, and then some.

Li's copula function was used to price hundreds of billions of dollars' worth of CDOs filled with mortgages. And because the copula function used CDS prices to calculate correlation, it was forced to confine itself to looking at the period of time when those credit default swaps had been in existence: less than a decade, a period when house prices soared. Naturally, default correlations were very low in those years. But when the mortgage boom ended abruptly and home values started falling across the country, correlations soared.

Bankers securitizing mortgages knew that their models were highly sensitive to house-price appreciation. If it ever turned negative on a national scale, a lot of bonds that had been rated triple-A, or risk-free, by copula-powered computer models would blow up. But no one was willing to stop the creation of CDOs, and the big investment banks happily kept on building more, drawing their correlation data from a period when real estate only went up.

"Everyone was pinning their hopes on house prices continuing to rise," says Kai Gilkes of the credit research firm CreditSights, who spent 10 years working at ratings agencies. "When they stopped rising, pretty much everyone was caught on the wrong side, because the sensitivity to house prices was huge. And there was just no getting around it. Why didn't rating agencies build in some cushion for this sensitivity to a house-price-depreciation scenario? Because if they had, they would have never rated a single mortgage-backed CDO."

Bankers should have noted that very small changes in their underlying assumptions could result in very large changes in the correlation number. They also should have noticed that the results they were seeing were much less volatile than they should have been—which implied that the risk was being moved elsewhere. Where had the risk gone?

They didn't know, or didn't ask. One reason was that the outputs came from "black box" computer models and were hard to subject to a commonsense smell test. Another was that the quants, who should have been more aware of the copula's weaknesses, weren't the ones making the big asset-allocation decisions. Their managers, who made the actual calls, lacked the math skills to understand what the models were doing or how they worked. They could, however, understand something as simple as a single correlation number. That was the problem.

"The relationship between two assets can never be captured by a single scalar quantity," Wilmott says. For instance, consider the share prices of two sneaker manufacturers: When the market for sneakers is growing, both companies do well and the correlation between them is high. But when one company gets a lot of celebrity endorsements and starts stealing market share from the other, the stock prices diverge and the correlation between them turns negative. And when the nation morphs into a land of flip-flop-wearing couch potatoes, both companies decline and the correlation becomes positive again. It's impossible to sum up such a history in one correlation number, but CDOs were invariably sold on the premise that correlation was more of a constant than a variable.

No one knew all of this better than David X. Li: "Very few people understand the essence of the model," he told The Wall Street Journal way back in fall 2005.

"Li can't be blamed," says Gilkes of CreditSights. After all, he just invented the model. Instead, we should blame the bankers who misinterpreted it. And even then, the real danger was created not because any given trader adopted it but because every trader did. In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust.

Nassim Nicholas Taleb, hedge fund manager and author of The Black Swan, is particularly harsh when it comes to the copula. "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked," he says. "Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south. "Anything that relies on correlation is charlatanism."

Li has been notably absent from the current debate over the causes of the crash. In fact, he is no longer even in the US. Last year, he moved to Beijing to head up the risk-management department of China International Capital Corporation. In a recent conversation, he seemed reluctant to discuss his paper and said he couldn't talk without permission from the PR department. In response to a subsequent request, CICC's press office sent an email saying that Li was no longer doing the kind of work he did in his previous job and, therefore, would not be speaking to the media.

In the world of finance, too many quants see only the numbers before them and forget about the concrete reality the figures are supposed to represent. They think they can model just a few years' worth of data and come up with probabilities for things that may happen only once every 10,000 years. Then people invest on the basis of those probabilities, without stopping to wonder whether the numbers make any sense at all.

As Li himself said of his own model: "The most dangerous part is when people believe everything coming out of it."

WASHINGTON – President Barack Obama wants a significant "down payment" for overhauling the health care system: $634 billion over 10 years. A senior administration official says Obama's budget calls for financing the overhaul by trimming Medicare spending and limiting tax deductions for upper-income earners. The official spoke on condition of anonymity because the budget won't be released until Thursday.About 48 million Americans are uninsured, according to recent estimates. The cost of guaranteeing coverage for all could easily exceed $1 trillion over 10 years.Obama has asked Congress for health reform this year, but senior members of both political parties say they are concerned about the cost.

The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006._______________________________________

Banks in Europe and the US face a new wave of losses linked to contracts issued to insure against companies going bust and defaulting on their loans, City analysts have warned.

After the billions lost over the US subprime market and leveraged loans, investment banks such as Morgan Stanley, Deutsche Bank, Barclays, UBS and RBS face losses on credit default swaps (CDS) – contracts that allow an investor to be repaid if a company loan or a bond defaults.

CDS contracts became a favourite tool of speculators, mostly hedge funds, which bought the contracts without having any link to the original lending. They bought the contract to trade or in the expectation the company would in fact default, meaning they could claim back the full value of a loan they never made.

The CDS market exploded to be worth as much as $50tn, many times the size of the underlying assets. Each loan could have thousands of protection contracts, even if there were only a few lenders. Hedge funds accounted for about 60% of CDS trading, according to ratings agency Fitch.

But now that a rising number of companies are going bust, the issuers of the contracts could face significant losses, analysts say. US carmaker General Motors, which is seeking government aid, was the company that had most protection bought and sold on it by the end of 2006, according to Fitch.

Investment banks were attracted by the method as they didn't have to report any issuance data to any regulator and could issue as many contracts as they wanted.

At present, nobody knows which banks have issued which contracts. The uncertainty and the deepening recession have sent the cost of insurance protection to record highs this week. The itraxx index, which tracks the senior debt of 25 European financial institutions, closed at 165 basis points today, near its record yesterday of 166 points, according to financial information provider Markit.

CDS contracts have also gained on growing uncertainty over eastern European banks and after Citigroup asked the US government for aid.

The banks say they are protected as they have daily updates on the collateral needed for their CDS contracts.________________________________________________

German CDS debt spreads hit record as economy crumblesThe cost of bankruptcy protection on German debt has reached an all-time high on spill-over from the financial crisis in Eastern Europe and mounting concerns about the stability of Germany's banking system.

The spike follows a warning by Deutsche Bank that Germany’s economy will contract by 5pc this year as industrial exports collapse at the fastest pace since the Great Depression.

Norbert Walter, the bank’s chief economist, said there was a risk of an even deeper slump if the economy fails to stabilize by the summer. “A bigger contraction can’t be ruled out,” he said.

The state governments of Hamburg and Schleswig-Holstein agreed on €3bn (£2.7bn) cash rescue on Tuesday for Landesbank HSH Nordbank, the world’s top source of finance for shipping, raising the public stake to 80pc. The bank has already drawn on a €10bn guarantee from the government’s bail-out fund Soffin. HSH lost €2.8bn last year, mostly on credit instruments and fall-out from the Lehman debacle.

“Of course these costs will weigh on the budget. We had no choice,” said Peter Harry Carstensen, the premier of Schleswig Holstein. He denied press reports that his own state was facing bankruptcy.

There are eleven state-owned Landesbanken in Germany and most are in trouble. While their mission is to boost regional industry and finance the family Mittelstand firms, they strayed disastrously into almost every form of leveraged excess through off-books `conduits’, many based in Dublin.

“The entire Landesbanken system is rotten,” said Hans Redeker, currency chief at BNP Paribas.”Credit will collapse if they are allowed to fail so they have to be recapitalized. But it is not just the banks in trouble: Germany’s entire export structure has been hit drastically.”

“German CDS spreads are going massively higher. German bank exposure to Eastern Europe, although less than Austria, is still very high. The markets have started to price in a de facto bail-out of Eastern Europe and they think that Germany that will have to pay the bill,” he said.

The rating agency Standard & Poor’s said in a report on Tuesday that the region was “shuddering to a halt”, with a number of countries were “crumbling under the weight of high foreign currency debt.” It is unclear whether they can roll over debts as Western banks retreat to their home market.

S&P said foreign debt is 115pc of GDP in Estonia, 103pc in Bulgaria, 93pc in Hungary, all far above danger level. “All the ingredients of a major crisis are in place,” said Jean-Michel Six, the group’s Europe economist.

The 2% IllusionTake everything they earn, and it still won't be enough.

President Obama has laid out the most ambitious and expensive domestic agenda since LBJ, and now all he has to do is figure out how to pay for it. On Tuesday, he left the impression that we need merely end "tax breaks for the wealthiest 2% of Americans," and he promised that households earning less than $250,000 won't see their taxes increased by "one single dime."

This is going to be some trick. Even the most basic inspection of the IRS income tax statistics shows that raising taxes on the salaries, dividends and capital gains of those making more than $250,000 can't possibly raise enough revenue to fund Mr. Obama's new spending ambitions.

Consider the IRS data for 2006, the most recent year that such tax data are available and a good year for the economy and "the wealthiest 2%." Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That's about 7% of all returns; the data aren't broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The richest 1% -- about 1.65 million filers making above $388,806 -- paid some $408 billion, or 39.9% of all income tax revenues, while earning about 22% of all reported U.S. income.

Note that federal income taxes are already "progressive" with a 35% top marginal rate, and that Mr. Obama is (so far) proposing to raise it only to 39.6%, plus another two percentage points in hidden deduction phase-outs. He'd also raise capital gains and dividend rates, but those both yield far less revenue than the income tax. These combined increases won't come close to raising the hundreds of billions of dollars in revenue that Mr. Obama is going to need.

But let's not stop at a 42% top rate; as a thought experiment, let's go all the way. A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That's less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable "dime" of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.

Fast forward to this year (and 2010) when the Wall Street meltdown and recession are going to mean far few taxpayers earning more than $500,000. Profits are plunging, businesses are cutting or eliminating dividends, hedge funds are rolling up, and, most of all, capital nationwide is on strike. Raising taxes now will thus yield far less revenue than it would have in 2006.

Mr. Obama is of course counting on an economic recovery. And he's also assuming along with the new liberal economic consensus that taxes don't matter to growth or job creation. The truth, though, is that they do. Small- and medium-sized businesses are the nation's primary employers, and lower individual tax rates have induced thousands of them to shift from filing under the corporate tax system to the individual system, often as limited liability companies or Subchapter S corporations. The Tax Foundation calculates that merely restoring the higher, Clinton-era tax rates on the top two brackets would hit 45% to 55% of small-business income, depending on how inclusively "small business" is defined. These owners will find a way to declare less taxable income.

The bottom line is that Mr. Obama is selling the country on a 2% illusion. Unwinding the U.S. commitment in Iraq and allowing the Bush tax cuts to expire can't possibly pay for his agenda. Taxes on the not-so-rich will need to rise as well.

On that point, by the way, it's unclear why Mr. Obama thinks his climate-change scheme won't hit all Americans with higher taxes. Selling the right to emit greenhouse gases amounts to a steep new tax on most types of energy and, therefore, on all Americans who use energy. There's a reason that Charlie Rangel's Ways and Means panel, which writes tax law, is holding hearings this week on cap-and-trade regulation.

Mr. Obama is very good at portraying his agenda as nothing more than center-left pragmatism. But pragmatists don't ignore the data. And the reality is that the only way to pay for Mr. Obama's ambitions is to reach ever deeper into the pockets of the American middle class.

Violent protests and riots are breaking out everywhere as economies collapse and governments fail. War is bound to follow.By Michael Klare

Editor's note: This article has also appeared on TomDispatch.com.

Feb. 26, 2009 |

The global economic meltdown has already caused bank failures, bankruptcies, plant closings and foreclosures and will, in the coming year, leave many tens of millions unemployed across the planet. But another perilous consequence of the crash of 2008 has only recently made its appearance: increased civil unrest and ethnic strife. Someday, perhaps, war may follow.

As people lose confidence in the ability of markets and governments to solve the global crisis, they are likely to erupt into violent protests or to assault others they deem responsible for their plight, including government officials, plant managers, landlords, immigrants and ethnic minorities. (The list could, in the future, prove long and unnerving.) If the present economic disaster turns into what President Obama has referred to as a "lost decade," the result could be a global landscape filled with economically fueled upheavals.

Indeed, if you want to be grimly impressed, hang a world map on your wall and start inserting red pins where violent episodes have already occurred. Athens (Greece), Longnan (China), Port-au-Prince (Haiti), Riga (Latvia), Santa Cruz (Bolivia), Sofia (Bulgaria), Vilnius (Lithuania) and Vladivostok (Russia) would be a start. Many other cities from Reykjavik, Paris, Rome and Zaragoza to Moscow and Dublin have witnessed huge protests over rising unemployment and falling wages that remained orderly thanks in part to the presence of vast numbers of riot police. If you inserted orange pins at these locations -- none as yet in the United States -- your map would already look aflame with activity. And if you're a gambling man or woman, it's a safe bet that this map will soon be far better populated with red and orange pins.

For the most part, such upheavals, even when violent, are likely to remain localized in nature, and disorganized enough that government forces will be able to bring them under control within days or weeks, even if -- as with Athens for six days last December -- urban paralysis sets in due to rioting, tear gas and police cordons. That, at least, has been the case so far. It is entirely possible, however, that, as the economic crisis worsens, some of these incidents will metastasize into far more intense and long-lasting events: armed rebellions, military takeovers, civil conflicts, even economically fueled wars between states.

Every outbreak of violence has its own distinctive origins and characteristics. All, however, are driven by a similar combination of anxiety about the future and lack of confidence in the ability of established institutions to deal with the problems at hand. And just as the economic crisis has proven global in ways not seen before, so local incidents -- especially given the almost instantaneous nature of modern communications -- have a potential to spark others in far-off places, linked only in a virtual sense.

A global pandemic of economically driven violence

The riots that erupted in the spring of 2008 in response to rising food prices suggested the speed with which economically related violence can spread. It is unlikely that Western news sources captured all such incidents, but among those recorded in the New York Times and the Wall Street Journal were riots in Cameroon, Egypt, Ethiopia, Haiti, India, Indonesia, Ivory Coast and Senegal.

In Haiti, for example, thousands of protesters stormed the presidential palace in Port-au-Prince and demanded food handouts, only to be repelled by government troops and U.N. peacekeepers. Other countries, including Pakistan and Thailand, quickly sought to deter such assaults by deploying troops at farms and warehouses throughout the country.

The riots only abated at summer's end when falling energy costs brought food prices crashing down as well. (The cost of food is now closely tied to the price of oil and natural gas because petrochemicals are so widely and heavily used in the cultivation of grains.) Ominously, however, this is sure to prove but a temporary respite, given the epic droughts now gripping breadbasket regions of the United States, Argentina, Australia, China, the Middle East and Africa. Look for the prices of wheat, soybeans and possibly rice to rise in the coming months -- just when billions of people in the developing world are sure to see their already marginal incomes plunging due to the global economic collapse.

Food riots were but one form of economic violence that made its bloody appearance in 2008. As economic conditions worsened, protests against rising unemployment, government ineptitude and the unaddressed needs of the poor erupted as well. In India, for example, violent protests threatened stability in many key areas. Although usually described as ethnic, religious or caste disputes, these outbursts were typically driven by economic anxiety and a pervasive feeling that someone else's group was faring better than yours -- and at your expense.

In April, for example, six days of intense rioting in Indian-controlled Kashmir were largely blamed on religious animosity between the majority Muslim population and the Hindu-dominated Indian government; equally important, however, was a deep resentment over what many Kashmiri Muslims experienced as discrimination in jobs, housing and land use. Then, in May, thousands of nomadic shepherds known as Gujjars shut down roads and trains leading to the city of Agra, home of the Taj Mahal, in a drive to be awarded special economic rights; more than 30 people were killed when the police fired into crowds. In October, economically related violence erupted in Assam in the country's far northeast, where impoverished locals are resisting an influx of even poorer, mostly illegal immigrants from nearby Bangladesh.

Economically driven clashes also erupted across much of eastern China in 2008. Such events, labeled "mass incidents" by Chinese authorities, usually involve protests by workers over sudden plant shutdowns, lost pay or illegal land seizures. More often than not, protesters demanded compensation from company managers or government authorities, only to be greeted by club-wielding police.

Needless to say, the leaders of China's Communist Party have been reluctant to acknowledge such incidents. This January, however, the magazine Liaowang (Outlook Weekly) reported that layoffs and wage disputes had triggered a sharp increase in such "mass incidents," particularly along the country's eastern seaboard, where much of its manufacturing capacity is located.

By December, the epicenter of such sporadic incidents of violence had moved from the developing world to Western Europe and the former Soviet Union. Here, the protests have largely been driven by fears of prolonged unemployment, disgust at government malfeasance and ineptitude, and a sense that "the system," however defined, is incapable of satisfying the future aspirations of large groups of citizens.

One of the earliest of this new wave of upheavals occurred in Athens on Dec. 6, 2008, after police shot and killed a 15-year-old schoolboy during an altercation in a crowded downtown neighborhood. As news of the killing spread throughout the city, hundreds of students and young people surged into the city center and engaged in pitched battles with riot police, throwing stones and firebombs. Although government officials later apologized for the killing and charged the police officer involved with manslaughter, riots broke out repeatedly in the following days in Athens and other Greek cities. Angry youths attacked the police -- widely viewed as agents of the establishment -- as well as luxury shops and hotels, some of which were set on fire. By one estimate, the six days of riots caused $1.3 billion in damage to businesses at the height of the Christmas shopping season.

Russia also experienced a spate of violent protests in December, triggered by the imposition of high tariffs on imported automobiles. Instituted by Prime Minister Vladimir Putin to protect an endangered domestic auto industry (whose sales were expected to shrink by up to 50 percent in 2009), the tariffs were a blow to merchants in the Far Eastern port of Vladivostok who benefited from a nationwide commerce in used Japanese vehicles. When local police refused to crack down on anti-tariff protests, the authorities were evidently worried enough to fly in units of special forces from Moscow, 3,700 miles away.

In January, incidents of this sort seemed to be spreading through Eastern Europe. Between Jan. 13 and Jan. 16, anti-government protests involving violent clashes with the police erupted in the Latvian capital of Riga, the Bulgarian capital of Sofia, and the Lithuanian capital of Vilnius. It is already essentially impossible to keep track of all such episodes, suggesting that we are on the verge of a global pandemic of economically driven violence.

A perfect recipe for instability

While most such incidents are triggered by an immediate event -- a tariff, the closure of a local factory, the announcement of government austerity measures -- there are systemic factors at work as well. While economists now agree that we are in the midst of a recession deeper than any since the Great Depression of the 1930s, they generally assume that this downturn -- like all others since World War II -- will be followed in a year, or two, or three, by the beginning of a typical recovery.

There are good reasons to suspect that this might not be the case -- that poorer countries (along with many people in the richer countries) will have to wait far longer for such a recovery, or may see none at all. Even in the United States, 54 percent of Americans now believe that "the worst" is "yet to come" and only 7 percent that the economy has "turned the corner," according to a recent Ipsos/McClatchy poll; fully a quarter think the crisis will last more than four years. Whether in the U.S., Russia, China or Bangladesh, it is this underlying anxiety -- this suspicion that things are far worse than just about anyone is saying -- that is helping to fuel the global epidemic of violence.

The World Bank's most recent status report, Global Economic Prospects 2009, fulfills those anxieties in two ways. It refuses to state the worst, even while managing to hint, in terms too clear to be ignored, at the prospect of a long-term, or even permanent, decline in economic conditions for many in the world. Nominally upbeat -- as are so many media pundits -- regarding the likelihood of an economic recovery in the not-too-distant future, the report remains full of warnings about the potential for lasting damage in the developing world if things don't go exactly right.

Two worries, in particular, dominate Global Economic Prospects 2009: that banks and corporations in the wealthier countries will cease making investments in the developing world, choking off whatever growth possibilities remain; and that food costs will rise uncomfortably, while the use of farmlands for increased biofuels production will result in diminished food availability to hundreds of millions.

Despite its Pollyanna-ish passages on an economic rebound, the report does not mince words when discussing what the almost certain coming decline in First World investment in Third World countries would mean:

"Should credit markets fail to respond to the robust policy interventions taken so far, the consequences for developing countries could be very serious. Such a scenario would be characterized by ... substantial disruption and turmoil, including bank failures and currency crises, in a wide range of developing countries. Sharply negative growth in a number of developing countries and all of the attendant repercussions, including increased poverty and unemployment, would be inevitable."

In the fall of 2008, when the report was written, this was considered a "worst-case scenario." Since then, the situation has obviously worsened radically, with financial analysts reporting a virtual freeze in worldwide investment. Equally troubling, newly industrialized countries that rely on exporting manufactured goods to richer countries for much of their national income have reported stomach-wrenching plunges in sales, producing massive plant closings and layoffs.

The World Bank's 2008 survey also contains troubling data about the future availability of food. Although insisting that the planet is capable of producing enough foodstuffs to meet the needs of a growing world population, its analysts were far less confident that sufficient food would be available at prices people could afford, especially once hydrocarbon prices begin to rise again. With ever more farmland being set aside for biofuels production and efforts to increase crop yields through the use of "miracle seeds" losing steam, the Bank's analysts balanced their generally hopeful outlook with a caveat: "If biofuels-related demand for crops is much stronger or productivity performance disappoints, future food supplies may be much more expensive than in the past."

Combine these two World Bank findings -- zero economic growth in the developing world and rising food prices -- and you have a perfect recipe for unrelenting civil unrest and violence. The eruptions seen in 2008 and early 2009 will then be mere harbingers of a grim future in which, in a given week, any number of cities reel from riots and civil disturbances that could spread like multiple brush fires in a drought.

Mapping a world at the brink

Survey the present world, and it's all too easy to spot a plethora of potential sites for such multiple eruptions -- or far worse. Take China. So far, the authorities have managed to control individual "mass incidents," preventing them from coalescing into something larger. But in a country with a more than 2,000-year history of vast millenarian uprisings, the risk of such escalation has to be on the minds of every Chinese leader.

On Feb. 2, a top Chinese party official, Chen Xiwen, announced that, in the last few months of 2008 alone, a staggering 20 million migrant workers, who left rural areas for the country's booming cities in recent years, had lost their jobs. Worse yet, they had little prospect of regaining them in 2009. If many of these workers return to the countryside, they may find nothing there either, not even land to work.

Under such circumstances, and with further millions likely to be shut out of coastal factories in the coming year, the prospect of mass unrest is high. No wonder the government announced a $585 billion stimulus plan aimed at generating rural employment and, at the same time, called on security forces to exercise discipline and restraint when dealing with protesters. Many analysts now believe that, as exports continue to dry up, rising unemployment could lead to nationwide strikes and protests that might overwhelm ordinary police capabilities and require full-scale intervention by the military (as occurred in Beijing during the Tiananmen Square demonstrations of 1989).

Or take many of the Third World petro-states that experienced heady boosts in income when oil prices were high, allowing governments to buy off dissident groups or finance powerful internal security forces. With oil prices plunging from $147 per barrel of crude oil to less than $40, such countries, from Angola to shaky Iraq, now face severe instability.

Nigeria is a typical case in point: When oil prices were high, the central government in Abuja raked in billions every year, enough to enrich elites in key parts of the country and subsidize a large military establishment; now that prices are low, the government will have a hard time satisfying all these previously well-fed competing obligations, which means the risk of internal disequilibrium will escalate. An insurgency in the oil-producing Niger Delta region, fueled by popular discontent with the failure of oil wealth to trickle down from the capital, is already gaining momentum and is likely to grow stronger as government revenues shrivel; other regions, equally disadvantaged by national revenue-sharing policies, will be open to disruptions of all sorts, including heightened levels of internecine warfare.

Bolivia is another energy producer that seems poised at the brink of an escalation in economic violence. One of the poorest countries in the Western Hemisphere, it harbors substantial oil and natural gas reserves in its eastern, lowland regions. A majority of the population -- many of Indian descent -- supports President Evo Morales, who seeks to exercise strong state control over the reserves and use the proceeds to uplift the nation's poor. But a majority of those in the eastern part of the country, largely controlled by a European-descended elite, resent central government interference and seek to control the reserves themselves. Their efforts to achieve greater autonomy have led to repeated clashes with government troops and, in deteriorating times, could set the stage for a full-scale civil war.

Given a global situation in which one startling, often unexpected development follows another, prediction is perilous. At a popular level, however, the basic picture is clear enough: Continued economic decline combined with a pervasive sense that existing systems and institutions are incapable of setting things right is already producing a potentially lethal brew of anxiety, fear and rage. Popular explosions of one sort or another are inevitable.

Some sense of this new reality appears to have percolated up to the highest reaches of the U.S. intelligence community. In testimony before the Senate Select Committee on Intelligence on Feb. 12, Adm. Dennis C. Blair, the new director of national intelligence, declared, "The primary near-term security concern of the United States is the global economic crisis and its geopolitical implications ... Statistical modeling shows that economic crises increase the risk of regime-threatening instability if they persist over a one to two year period" -- certain to be the case in the present situation.

Blair did not specify which countries he had in mind when he spoke of "regime-threatening instability" -- a new term in the American intelligence lexicon, at least when associated with economic crises -- but it is clear from his testimony that U.S. officials are closely watching dozens of shaky nations in Africa, the Middle East, Latin America and Central Asia.

Now go back to that map on your wall with all those red and orange pins in it and proceed to color in appropriate countries in various shades of red and orange to indicate recent striking declines in gross national product and rises in unemployment rates. Without 16 intelligence agencies under you, you'll still have a pretty good idea of the places that Blair and his associates are eyeing in terms of instability as the future darkens on a planet at the brink.

President Barack Obama told a joint session of Congress earlier this week that his administration has a plan to prevent mortgage foreclosures for millions of Americans. In fact, the Department of Housing and Urban Development proudly says that it is shoveling money out the door as fast as it can.

Yesterday, researchers at the University of Virginia took an in-depth look at just where foreclosures are happening. It turns out that 87 percent of foreclosures housing value loss is taking place in just four states--California, Florida, Arizona and Nevada. According the press release describing the study:

National housing price declines and foreclosures have not been as severe as some analyses have indicated, and they are not as important as financial manipulations in bringing on the global recession, according to a new analysis of foreclosures in 50 states, 35 metropolitan areas and 236 counties by University of Virginia professor William Lucy and graduate student Jeff Herlitz.

Their analysis shows that most foreclosures have been concentrated in California, Florida, Nevada, Arizona and a modest number of metropolitan counties in other states. In fact, they claim that "66 percent of potential housing value losses in 2008 and subsequent years may be in California, with another 21 percent in Florida, Nevada and Arizona, for a total of 87 percent of national declines."

"California had only 10 percent of the nation's housing units, but it had 34 percent of foreclosures in 2008," Lucy and Herlitz reported.

It should be noted that the current average national foreclosure rate of 0.79 percent is about double the rate it was in 2000. What about the effect of foreclosures on the balance sheets of American banks?

Potential losses in housing values from 2008 foreclosures in all 50 states — if values decline to 2000 levels — were less than one-third of the $350 billion provided to banks and insurance companies to cope with losses in mortgage-backed securities, Lucy and Herlitz estimated.

See more of the UVA findings here.

*not "foreclosures" as originally headlined. Nevada, California, Arizona, and Florida do rank numbers 1, 2, 3, and 4 in foreclosure activity. All together the four states account for 55 percent of national foreclosure activity.

No one can prove that the crash in global equity markets has anything to do with Obama becoming president, but there are reasons to think so.

Obama is seeking to implement virtually overnight a blueprint for an unprecedent expansion of government's size and power, and huge new tax burdens and deficits will be required to fund this. He justifies it all with the unproven and logic-lacking theory that more government spending and intervention can expand the economy. He is rushing to implement a massive shift in the way we use energy by putting in place a politically motivated tax on the cheapest energy available, based on an increasingly smaller "consensus" among scientists that reducing carbon emissions will "save the planet."

In short, Obama is taking monumental risks, not only with his own presidency, but with the future of our country, and ultimately with the well-being of the entire world. He wasn't kidding when he said he was audacious. But it's increasingly looking like his audacity is spinning out of control. In my view, that's what is worrying equity markets all over the world. This is far more serious than the subprime lending and related financial crisis, which is well on its way to getting fixed.

Let me be very clear on the economics of President Obama’s State of the Union speech and his budget. He is declaring war on investors, entrepreneurs, small businesses, large corporations, and private-equity and venture-capital funds. That is the meaning of his anti-growth tax-hike proposals, which make absolutely no sense at all -- either for this recession or from the standpoint of expanding our economy’s long-run potential to grow.

Raising the marginal tax rate on successful earners, capital, dividends, and all the private funds is a function of Obama’s left-wing social vision, and a repudiation of his economic-recovery statements. Ditto for his sweeping government-planning-and-spending program, which will wind up raising federal outlays as a share of GDP to at least 30 percent, if not more, over the next 10 years.

This is nearly double the government-spending low-point reached during the late 1990s by the Gingrich Congress and the Clinton administration. While not quite as high as spending levels in Western Europe, we regrettably will be gaining on this statist-planning approach.

Study after study over the past several decades has shown how countries that spend more produce less, while nations that tax less produce more. Obama is doing it wrong on both counts.

And as far as middle-class tax cuts are concerned, Obama’s cap-and-trade program will be a huge across-the-board tax increase on blue-collar workers, including unionized workers. Industrial production is plunging, but new carbon taxes will prevent production from ever recovering. While the country wants more fuel and power, cap-and-trade will deliver less.

The tax hikes will generate lower growth and fewer revenues. Yes, the economy will recover. But Obama’s rosy scenario of 4 percent recovery growth in the out years of his budget is not likely to occur. The combination of easy money from the Fed and below-potential economic growth is a prescription for stagflation. That’s one of the messages of the falling stock market.

Essentially, the Obama economic policies represent a major Democratic party relapse into Great Society social spending and taxing. It is a return to the LBJ/Nixon era, and a move away from the Reagan/Clinton period. House Republicans, fortunately, are 90 days sober, as they are putting up a valiant fight to stop the big-government onslaught and move the GOP back to first principles.

Noteworthy up here on Wall Street, a great many Obama supporters -- especially hedge-fund types who voted for “change” -- are becoming disillusioned with the performances of Obama and Treasury man Geithner. There is a growing sense of buyer’s remorse. Well then, do conservatives dare say: We told you so?

An Interview with Canadian Prime Minister Stephen Harper What follows below is the transcript of my interview with Canadian Prime Minister Stephen Harper on last night's show. Mr. Harper is a trained economist and quite an impressive statesman. Our northern neighbors are lucky to have him at the helm. We covered a wide range of key topics including the ailing banking system, risks of protectionism, oil sands and autos. As you'll see below, Mr. Harper offered some very wise observations and insight.

LARRY KUDLOW: All right. We are honored to welcome Canadian Prime Minister Stephen Harper to the program. Mr. Prime Minister, thank you very much.

PRIME MINISTER STEPHEN HARPER: It's nice to be here, Larry.

KUDLOW: Let me begin with an interesting subject here, banking. Everybody's talking about banking. The Canadian banks appear to be in much better shape than the American banks. They have fewer toxic assets. Their losses aren't nearly as bad. No one's talking about bankruptcy up there. I want to learn from our northern cousins. What can you tell us? Why are Canadian banks looking better than our banks?

HARPER: Well first of all I can tell you, it is true. We have, I think, the only banks in the western world where we’re not looking at bailouts or anything like that.

KUDLOW: No TARP money sir, if I’m not mistaken? No TARP money?

HARPER: We haven’t got any TARP money. We’ve gone in and done some market transactions with our banks to improve liquidity. But I think the reasons are really complex, Larry. You know, first of all, our banks are private. We don’t have a Fannie Mae or Freddie Mac equivalent mucking around in the system.

KUDLOW: Is that a lesson right there Prime Minister?

HARPER: Well, I think my observation is those are institutions with a difficult private/public mix. And sometimes private/ public mixes have benefits and sometimes they have the worst of both worlds. We don’t have anything like that. We do have though, a strong system of regulation, and activist regulators, who go and meet with the sector. But they’re macro, prudential kind of regulations. They don’t try and micromanage banks’ decisions. We try and establish good oversight and transparency.

KUDLOW: Do you have leverage and borrowing ratios that might have been enforced? Because that’s clearly one of the breakdowns here in the states?

HARPER: Well, we do have leverage ratios. What’s ironic is that our own banks had not actually achieved those ratios. They were actually working under them. Part of what we…

KUDLOW: They were under leveraged?

HARPER: They were under leveraged.

KUDLOW: Wait, wait. Canadian banks were under leveraged?

HARPER: Under what they could have been.

KUDLOW: I didn’t know there was such a thing on this entire planet earth.

HARPER: Well I think part of what we have done is through the system of regulation we’ve had, we’ve encouraged a fairly cautious culture in the banks. For example, our banks, when they sign mortgages, largely hold those mortgages rather than trading them. So they have a lot more interest in the underlying quality of those mortgages. And we avoided the sub-prime kind of problem.

KUDLOW: Did I hear you at your final news conference with President Obama last week -- you turned down, or your government or the regulators turned down a merger from one of the large Canadian banks. Is “too big to fail” solved in part by not letting them get so big? Is that a model that needs to be more regulated?

HARPER: Well I think the truth is we already have a highly concentrated sector. We have only six major banks that have most of the market. We have only three major insurance firms. And the banks also generally control the major brokerages. So obviously, to go any farther in terms of concentration without opening up the Canadian market itself would be a highly controversial decision.

KUDLOW: I want to ask you another economic question. You’re in a recession, but really, it just began. Your unemployment rate is a little bit less than the United States. Your stock market has been hit bad, as hard as our stock market, so it’s been very poor. However, from a little bit of research, the top federal personal tax rate in Canada, if I have this right, is 29 percent. Ours is 35. Mr. Obama says he’s going to push it up to 40, back pre-Bush. Is that true, 29 percent?

HARPER: Well in fairness it’s 29 percent, but there is a provincial tax put on top of that.

KUDLOW: Well we have that too.

HARPER: I think our combined income tax rate is still higher than yours.

KUDLOW: Really? How high are the provincial?

HARPER: At the highest, they’re about half, my recollection is about half of what the federal would be. On top of that they kick in at a much lower level of income. Ours kick in at about $130,000. Obviously, looking into the future, when we have a bit more fiscal room, that is something we would like to tackle. We’re bringing the corporate rate down. Our corporate tax rates will be the lowest in the G7 in the few years.

KUDLOW: Nineteen percent, is that correct? Nineteen percent?

HARPER: I think it’s down to 18 and a half, or 18.

KUDLOW: Wow. We’re at 35 percent.

HARPER: It’ll be at 15 percent in 2012. So we’ll have the lowest in the G7.

KUDLOW: Looking ahead to try to get through this banking mess, and try to get out of this most difficult recession, given the fact that Canadian banks have had a good performance, and given the fact that your tax rates—what advice would you give the United States from your perch?

HARPER: You know Larry, I’ve been asked that several times today, and unfortunately a lot of my advice would be don’t get into this mess in the first place. These are not easy things to deal with. You know, obviously we’ve got a drop in activity like you’ve got here. That’s why we’ve got a stimulus package. We don’t have a banking mess. We don’t have a mortgage mess. The truth of the matter is the president’s administration is going to look at a lot of polices, I know a lot of polices you don’t like, because a lot of them do have very serious long-run dangers. But the fact of the matter is they’ve got to do some things now that stop the continuing drop in economic activity. And the short term is going to drive a lot of decisions, for better or worse.

KUDLOW: Well if Canada is lowering its tax burdens, wouldn’t that be a reasonable example to your friends in the south?

HARPER: Well let me be clear though. When we lowered our tax burdens—and we did this in our first stimulus package over a year ago—we did that knowing we could lower our tax burdens while keeping our structural budget surplus in the long term. We could afford those tax cuts without going into deficit, immediately or in the long term. We’ve now done a second stimulus that is spending. It is short term. We’ll come out of it and we’ll go back into surplus. But we believe strongly in Canada, there’s a strong consensus, that we should keep our budget in a surplus position structurally in the long term. So we will only cut taxes if we are sure that is affordable.

KUDLOW: All right. And these tax rates, particularly the business tax rates, that’s law?

HARPER: That’s law.

KUDLOW: 19 percent or 18 percent, that’s done?

HARPER: Those are all legislated and they’ll come in.

KUDLOW: All right, let me move on quickly. Energy and climate change. The Canadian oil sands. We’ve had all the major CEOs on this program several times. Canada is our biggest importer, our biggest source. Now, problem. The Obama administration—Carol Browner—his top energy person who was up at the conference you just completed, they are against the Canadian oil sands because of the carbon emissions issue. Some states like California may actually try to stop the importation of energy and oil from the Canadian sands. What can you tell us? How is this going to be resolved?

HARPER: Well first of all, let me be clear about the importation of oil sands oil. Regardless of what any legislature does, the United States will be importing this oil. Because there is absolutely no doubt if you look at the supply and demand pattern into the future, the United States is going to need Canadian oil. It is the one secure, growing, market-based source of energy that the United States has. So there will be no choice but to import oil sands. We…

KUDLOW: Well you say that. But that’s an economic decision. But what about the political, legislative route? Did you talk to President Obama about that? His whole campaign, and as I said, he’s got Carol Browner running this from the White House; he’s got people all over his administration totally hostile to the oil sands because of the carbon problem.

HARPER: Well, and look, we believe there is also, there is a carbon problem there, Larry. And we’re prepared to work to reduce the carbon footprint of the oil sands. But as President Obama himself said, when he talked about the oil sands, he also talked about coal-fired electricity in the United States. Carbon emissions from coal-fired electricity in the United States are 40X the emission of the oil sands. So we’ll take care of, we’ll work on that problem, just as we expect the United States to be working on the problem of coal-fired electricity.

KUDLOW: But you don’t think the flow of your exports of the oil sands will be stopped? You don’t think that flow will be stopped because of the environmental, climate change considerations?

HARPER: I think that policy—any policy like that—is completely unrealistic. If you look at American needs for energy and where Americans can get supply at a reasonable price, it’s completely unrealistic. But it doesn’t mean that we will shirk our environmental responsibilities. We are making significant investments, carbon capture and storage, and other things, that your government is also doing. And we will do what we can to reduce the carbon footprint. But there should be no illusion that economic reality will hit those environmental polices pretty hard when one goes to implement them.

KUDLOW: One can only hope on that point. As I understand it, your latest fiscal package actually lowered import barriers in a number of places which you believe helps Canada and helps the rest of the world. Now the Unites States stimulus package raises import barriers with a “Buy America” provision for iron and steel and other infrastructure materials. Did you talk to President Obama? How’s this going to be resolved? You’re going one way, they’re going another.

HARPER: Look, we certainly raised our concerns. And as you know that provision was modified in the Senate to insure that they would conform with all existing trade obligations. There are trade provisions that allow you to have preferences in government procurement. But we think it’s very important, if we’re going to kickstart this global economy, that administrations around the world avoid turning stimulus packages into protectionism. Because if you try and stimulate a national economy at the expense of the global economy, we’re going to make the whole situation worse around the world. I think–my conversations with the president—I am quite convinced he understands that, he understands how serious it is to avoid a protectionist drift in this present economic climate.

KUDLOW: All right, last one Prime Minister. You have up in Canada if I’m not mistaken about a fifth of the General Motors/UAW workforce. You have given them some money as we have. How much money are you going to be prepared to give? They’re going to come back for much more in the next tranche, I guess at the end of March. How much money will you and the taxpayers of Canada be prepared to give?

HARPER: Well Larry we haven’t decided that. We’re doing due diligence on these guys. They’ve submitted our plans. We’re going to watch what’s being done in the United States. I mean, we’re under no illusion about why we’re doing this. The United States is engaged in a politically-directed restructuring of the industry. We came to the conclusion, whether one is for it or against it, that we have to put our skin in the game…

KUDLOW: And if I may, politically-directed, as opposed to let’s say, bankruptcy directed.

HARPER: Right, right. Absolutely. We came to the conclusion that if we don’t put our 20 percent skin in the game, we’re going to end up with an industry that’s restructured out of Canada entirely. We know it’s going to be a smaller industry in the future. There are some very difficult decisions that are going to have to be made. I hope both of our governments are willing to impose those decisions on all of the participants, on all of the players. Because that’s the only way we’re going to make sure…

KUDLOW: You’re kind of stuck, you’re kind of stuck. If we throw money at them you’re going to have to throw more money at them. Is that what you’re saying?

HARPER: I think if we’re not in the game the industry will be restructured out of Canada. And it’s frankly too important an industry to Canada. It’s probably close to 10 percent of our GDP that depends on that industry. A huge percentage in the province of Ontario, our industrial heartland. But we as governments, both Canadian and American governments, we have to make the industry, all of the players in the industry, make the difficult decisions necessary to make those sustainable companies.

Recently, a firestorm ignited in Wisconsin when I, as Milwaukee County executive, refused to submit a wish list to Gov. Jim Doyle for items in the federal "stimulus" package.

Gov. Doyle -- like other politicians -- had lined up at the federal trough begging for billions in "free money" to cover budget deficits and to fuel new spending. He and others simply couldn't understand and were outraged that I didn't join them, and that I didn't relent even after the president signed the stimulus bill into law.

My explanation is simple. First, this money isn't free. Second, under Gov. Doyle our state has borrowed vast sums of money and avoided making tough budget decisions while expanding government programs. In three biannual budgets since he took office in 2003, new state bonding exceeded new tax revenue collections by $2.1 billion. During good times, the governor had been borrowing money to underwrite expansions of health care, education and environmental programs. If he is bailed out now, the federal stimulus funds will only enable the governor and others to go on spending and even taking on new obligations that will lead to larger deficits down the road. Third, if we grow government rather than private-sector jobs, we will not help the economy. Strong leadership, honest budgeting and tax cuts would do a lot more.

This burst housing bubble that led to the recession was created when millions of people were allowed (or encouraged) to spend borrowed money on homes they couldn't afford and were later forced into foreclosure.

Apparently Washington politicians learned nothing from this process. They rushed to spend $787 billion of borrowed money on new government programs in the name of economic stimulus. But even this loan of taxpayer money -- essentially the largest mortgage in history -- will come due. When it does, our children and grandchildren will pay for this imprudence.

As popular as the federal "stimulus" package is with Washington politicians, it is more popular among state and local politicians who view federal money as a cure for their fiscal woes.

Wisconsin is afflicted with fiscal woes. In every budget he has signed, Gov. Doyle postponed difficult decisions using accounting gimmicks and excessive bonding to pay for ongoing operational costs. The most egregious example is the damage done to the transportation fund over the past six years, which uses state gas taxes and vehicle registration fees to fund road projects. The governor has raided the segregated fund for a total of $1.2 billion to cover ongoing operational costs for government programs. He's partially replaced the raided funds with $865.5 million in bonds.

As a result of borrowing against tomorrow to live for today, the governor left Wisconsin's budget vulnerable. So in the fall of 2008 when recession caused a sharp decline in tax revenue, the state was forced into the red.

Wisconsin now faces an unprecedented $5.75 billion budget deficit, fourth-largest in the nation. Many municipalities also face deficits. My county, however, finished fiscal year 2007 with a $7.9 million surplus and will break even for fiscal year 2008 when the books are closed next month. Why? Because we made tough budget decisions demanded by the taxpayers.

State and local officials who failed to do so are looking to the federal government for a bailout. But what happens when the stimulus money is gone? Is the federal government committed to funding the projects it will now underwrite forever? I'm not willing to bet on it.

The stimulus is a classic bait-and-switch. Once the highways are built and social-service case loads have increased, Wisconsin will be left with the bill to maintain the new roads and services. This will force Wisconsin to raise new taxes. Gov. Doyle and legislative Democrats are already discussing higher taxes on hospitals, retailers, employers and even Internet downloads to feed their spending addiction.

The stimulus is also a bait-and-switch on employment. While the stimulus package might create a few construction jobs, the federal money will run out and those workers will lose their jobs. Even worse, most of the money is actually spent on new government programs and on bailing out failed state and local governments.

For the vast majority of residents of my state, the stimulus funds will not help them pay the mortgage or replenish their depleted retirement savings as they worry about being laid off.

True economic stimulus creates sustainable private-sector jobs. The fastest, most effective way to create them is to reduce taxes and implement regulatory and fiscal policies that encourage job growth and economic investment. History has shown repeatedly from John F. Kennedy to Ronald Reagan that as taxes are cut, consumers spend more and investors put more money in the economy. This, in turn, creates jobs, and grows the economy.

Too many politicians confuse more government spending with economic recovery. I believe that's the wrong approach, and I will not submit a wish list for new government spending. Excessive spending will only lead to higher taxes, and that will drive jobs away when we need them the most.

We need to use these challenging times as an opportunity to streamline government and reduce the tax burden on working families. In 2002, during my first campaign for county executive, I promised to spend taxpayer money as if it were my own. If government -- at all levels -- were to do just that, we could reduce taxes and stimulate the economy. That would put people back to work again. And that is something on my wish list.

I really feel a sense of profound disappointment coming up here. We are having a great financial problem around the world. And finance doesn't work without some sense of trust and confidence and people meaning what they say. You take their oral word and their written word as a sign that their intentions will be carried out.

The letter of invitation I had to this affair indicated that there would be about 40 people here, people with whom I could have an intimate conversation. So I feel a bit betrayed this evening. Forty has swelled to I don't know how many, and I don't know how intimate our conversation can be. But I will, at the very least, be informal.

There is a certain interest in what's going on in the financial world. And I will disappoint you by saying I don't know all the answers. But I know something about the problem. Let me just sketch it out a little bit and suggest where we may be going. There is a lot of talk about how we get out of this, but I think it's worth remembering, or analyzing, how this all started.

This is not an ordinary recession. I have never, in my lifetime, seen a financial problem of this sort. It has the makings of something much more serious than an ordinary recession where you go down for a while and then you bounce up and it's partly a monetary - but a self-correcting - phenomenon. The ordinary recession does not bring into question the stability and the solidity of the whole financial system. Why is it that this is so much more profound a crisis? I'm not saying it's going to get anywhere as serious as the Great Depression, but that was not an ordinary business cycle either.

This phenomenon can be traced back at least five or six years. We had, at that time, a major underlying imbalance in the world economy. The American proclivity to consume was in full force. Our consumption rate was about 5% higher, relative to our GNP or what our production normally is. Our spending - consumption, investment, government -- was running about 5% or more above our production, even though we were more or less at full employment.

You had the opposite in China and Asia, generally, where the Chinese were consuming maybe 40% of their GNP - we consumed 70% of our GNP. They had a lot of surplus dollars because they had a lot of exports. Their exports were feeding our consumption and they were financing it very nicely with very cheap money. That was a very convenient but unsustainable situation. The money was so easy, funds were so easily available that there was, in effect, a kind of incentive to finding ways to spend it.

When we finished with the ordinary ways of spending it - with the help of our new profession of financial engineering - we developed ways of making weaker and weaker mortgages. The biggest investment in the economy was residential housing. And we developed a technique of manufacturing class D mortgages but putting them in packages which the financial engineers said were class A.

So there was an enormous incentive to take advantage of this bit of arbitrage - cheap money, poor mortgages but saleable mortgages. A lot of people made money through this process. I won't go over all the details, but you had then a normal business cycle on top of it. It was a period of enthusiasm. Everybody was feeling exuberant. They wanted to invest and spend.

You had a bubble first in the stock market and then in the housing market. You had a big increase in housing prices in the United States, held up by these new mortgages. It was true in other countries as well, but particularly in the United States. It was all fine for a while, but of course, eventually, the house prices levelled off and began going down. At some point people began getting nervous and the whole process stopped because they realized these mortgages were no good.

You might ask how it went on as long as it did. The grading agencies didn't do their job and the banks didn't do their job and the accountants went haywire. I have my own take on this. There were two things that were particularly contributory and very simple. Compensation practices had gotten totally out of hand and spurred financial people to aim for a lot of short-term money without worrying about the eventual consequences. And then there was this obscure financial engineering that none of them understood, but all their mathematical experts were telling them to trust. These two things carried us over the brink.

One of the saddest days of my life was when my grandson - and he's a particularly brilliant grandson - went to college. He was good at mathematics. And after he had been at college for a year or two I asked him what he wanted to do when he grew up. He said, "I want to be a financial engineer." My heart sank. Why was he going to waste his life on this profession?

A year or so ago, my daughter had seen something in the paper, some disparaging remarks I had made about financial engineering. She sent it to my grandson, who normally didn't communicate with me very much. He sent me an email, "Grandpa, don't blame it on us! We were just following the orders we were getting from our bosses." The only thing I could do was send him back an email, "I will not accept the Nuremberg excuse."

There was so much opaqueness, so many complications and misunderstandings involved in very complex financial engineering by people who, in my opinion, did not know financial markets. They knew mathematics. They thought financial markets obeyed mathematical laws. They have found out differently now. You know, they all said these events only happen once every hundred years. But we have "once every hundred years" events happening every year or two, which tells me something is the matter with the analysis.

So I think we have a problem which is not an ordinary business cycle problem. It is much more difficult to get out of and it has shaken the foundations of our financial institutions. The system is broken. I'm not going to linger over what to do about it. It is very difficult. It is going to take a lot of money and a lot of losses in the banking system. It is not unique to the United States. It is probably worse in the UK and it is just about as bad in Europe and it has infected other economies as well. Canada is relatively less infected, for reasons that are consistent with the direction in which I think the financial markets and financial institutions should go.

So I'll jump over the short-term process, which is how we get out of the mess, and consider what we should be aiming for when we get out of the mess. That, in turn, might help instruct the kind of action we should be taking in the interim to get out of it.

In the United States, in the UK, as well - and potentially elsewhere - things are partly being held together by totally extraordinary actions by a central bank. In the United States, it's the Federal Reserve, in London, the Bank of England. They are providing direct credit to markets in massive volume, in a way that contradicts all the traditions and laws that have governed central banking behaviour for a hundred years.

So what are we aiming for? I mention this because I recently chaired a report on this. It was part of the so-called Group of 30, which has got some attention. It's a long and rather turgid report but let me simplify what the conclusion is, which I will state more boldly than the report itself does.

In the future, we are going to need a financial system which is not going to be so prone to crisis and certainly will not be prone to the severity of a crisis of this sort. Financial systems always fluctuate and go up and down and have crises, but let's not have a big crisis that undermines the whole economy. And if that's the kind of financial system we want and should have, it's going to be different from the financial system that has developed in the last 20 years.

What do I mean by different? I think a primary characteristic of the system ought to be a strong, traditional, commercial banking-type system. Probably we ought to have some very large institutions - or at least that's the way the market is going - whose primary purpose is a kind of fiduciary responsibility to service consumers, individuals, businesses and governments by providing outlets for their money and by providing credit. They ought to be the core of the credit and financial system.

This kind of system was in place in the United States thirty years ago and is still in place in Canada, and may have provided support for the Canadian system during this particularly difficult time. I'm not arguing that you need an oligopoly to the extent you have one in Canada, but you do know by experience that these big commercial banking institutions will be protected by the government, de facto. No government has been willing to permit these institutions, or the creditors and depositors to these institutions, to be damaged. They recognize that the damage to the economy would be too great.

What has happened recently just underscores that. And I think we're at the point where we can no longer fool ourselves by saying that is not the case. The government will support these institutions, which in turn implies a closer supervision and regulation of those institutions, a more effective regulation than we've had, at least in the United States, in the recent past. And that may involve a lot of different agencies and so forth. I won't get into that.

But I think it does say that those institutions should not engage in highly risky entrepreneurial activity. That's not their job because it brings into question the stability of the institution. They may make a lot of money and they may have a lot of fun, in the short run. It may encourage pursuit of a profit in the short run. But it is not consistent with the stability that those institutions should be about. It's not consistent at all with avoiding conflict of interest.

These institutions that have arisen in the United States and the UK that combine hedge funds, equity funds, large proprietary trading with commercial banks, have enormous conflicts of interest. And I think the conflicts of interest contribute to their instability. So I would say let's get rid of that. Let's have big and small commercial banks and protect them - it's the service part of the financial system.

And then we have the other part, which I'll call the capital market system, which by and large isn't directly dealing with customers. They're dealing with each other. They're trading. They're about hedge funds and equity funds. And they have a function in providing fluid markets and innovating and providing some flexibility, and I don't think they need to be so highly regulated. They're not at the core of the system, unless they get really big. If they get really big then you have to regulate them, too. But I don't think we need to have close regulation of every peewee hedge fund in the world.

So you have this bifurcated - in a sense - financial system that implies a lot about regulation and national governments. If you're going to have an open system, you have got to get much more cooperation and coordination from different countries. I think that's possible, given what we're going through. You've got to do something about the infrastructure of the system and you have to worry about the credit rating agencies.

These banks were relying on credit rating agencies while putting these big packages of securities together and selling them. They had practically - they would never admit this - given up credit departments in their own institutions that were sophisticated and well-developed. That was a cost centre - why do we need it, they thought. Obviously that hasn't worked out very well.

We have to look at the accounting system. We have to look at the system for dealing with derivatives and how they're settled. So there are a lot of systemic issues. The main point I'm making is that we want to emerge from this with a more stable system. It will be less exciting for many people, but it will not warrant - I don't think the present system does, either -- $50 million dollar paydays in that central part of the system. Or even $25 or $100 million dollar paydays. If somebody can go out and gamble and make that money, okay. But don't gamble with the public's money. And that's an important distinction.

It's interesting that what I'm arguing for looks more like the Canadian system than the American system. When we delivered this report in a press conference, people said, "Oh you mean, banks won't be able to have hedge funds? What are you talking about?" That same day, Citigroup announced, "We want to get rid of all that stuff. We now realize it was a mistake. We want to go back to our roots and be a real commercial bank." I don't know whether they'll do that or not. But the fact that one of the leading proponents of the other system basically said, "We give up. It's not the right system," is interesting.

So let me just leave it at that. We've got more than 40 people here but they're permitted to ask questions, is that the deal?

In his campaign and inaugural address, Barack Obama cast himself as a moderate man seeking common ground with conservatives.

Yet, his budget calls for the radical restructuring of the U.S. economy, a sweeping redistribution of power and wealth to government and Democratic constituencies. It is a declaration of war on the Right.

The real Obama has stood up, and lived up to his ranking as the most left-wing member of the United States Senate.

Barack has no mandate for this. He was even behind McCain when the decisive event that gave him the presidency occurred -- the September collapse of Lehman Brothers and the market crash.

Republicans are under no obligation to render bipartisan support to this statist coup d'etat. For what is going down is a leftist power grab that is anathema to their principles and philosophy.

Where the U.S. government usually consumes 21 percent of gross domestic product, this Obama budget spends 28 percent in 2009 and runs a deficit of $1.75 trillion, or 12.7 percent of GDP. That is four times the largest deficit of George W. Bush and twice as large a share of the economy as any deficit run since World War II.

Add that 28 percent of GDP spent by the U.S. government to the 12 percent spent by states, counties and cities, and government will consume 40 percent of the economy in 2009.

We are not "headed down the road to socialism." We are there.

Since the budget was released, word has come that the U.S. economy did not shrink by 3.8 percent in the fourth quarter, but 6.2 percent. All the assumptions in Obama's budget about growth in 2009 and 2010 need to be revised downward, and the deficits revised upward.

Look for the deficit for 2009 to cross $2 trillion.

Who abroad is going to lend us the trillions to finance our deficits without demanding higher interest rates on the U.S. bonds they are being asked to hold? And if we must revert to the printing press to create the money, what happens to the dollar?

As Americans save only a pittance and have lost -- in the value of homes, stocks, bonds and other assets -- $15 trillion to $20 trillion since 2007, how can the people provide the feds with the needed money?

In his speech to Congress, Obama promised new investments in energy, education and health care. Every kid is going to get a college degree. We're going to find a cure for cancer.

Who is going to pay for all this?

The top 2 percent, the filthy rich who got all those Bush tax breaks, say Democrats. But the top 5 percent of income earners already pay 60 percent of U.S. income taxes, while the bottom 40 percent pays nothing.

Those paying a federal tax rate of 35 percent will see it rise to near 40 percent and will lose a fifth of the value of their deductions for taxes, mortgage interest and charitable contributions.

Yet, two-thirds of small businesses are taxed at the same rate as individuals. Consider what this means to the owner of a restaurant and bar in Los Angeles open from noon to midnight, where a husband and wife each put in 80 hours a week.

At year's end, the couple finds they have actually made a profit of $500,000 that they can take home in salary.

What is the Obama-Schwarzenegger tax take on that salary?

Their U.S. tax rate will have hit 39.6 percent.

Their California income tax will have hit 9.55 percent.

Medicare payroll taxes on the proprietor as both employer and salaried employee will be $14,500. Social Security payroll taxes for the proprietor as both employer and employee will be $13,243.

In short, U.S. and state income and payroll taxes will consume half of all the pair earned for some 8,000 hours of work.

From that ravaged salary they must pay a state sales tax of 8.25 percent, gas taxes for the 50-mile commute, and tens of thousands in property taxes on both their restaurant and home. And, after being pilloried by politicians for having feasted in the Bush era, they are now told the tax deduction they get for contributing to the church is to be cut 20 percent, while millions of Obama voters, who paid no U.S. income tax at all, will be getting a tax cut -- i.e., a fat little check -- in April.

Any wonder native-born Californians are fleeing the Golden Land?

Markets are not infallible. But the stock market has long been a "lead indicator" of where the economy will be six months from now. What are the markets, the collective decisions of millions of investors, saying?

Having fallen every month since Obama's election, with January and February the worst two months in history, they are telling us the stimulus package will not work, that Tim Geithner is clueless about how to save the banks, that the Obama budget portends disaster for the republic.

The airwaves and Intertubes are filled with images of this bridge in Missouri – the first transportation project in the nation to be funded through the stimulus bill signed by president Obama last month. In their coverage of this project, the media uniformly point to the jobs it has created for local workers, and neglect to reflect on its economic costs.

As Doug Bandow pointed out in his earlier post, even Congress’s own Budget Office expects the stimulus to shrink our economy in the long term. And the CBO’s analysis is arguably too rosy, neglecting the crucial psychological effect of Washington’s unprecedented spending spree on American consumers.

An NBC/WSJ public opinion poll found in January that “60 percent say they’re concerned that the government will spend too much money in trying to stimulate the economy, ultimately increasing the size of the debt.” That’s up from 57 percent who were already terrified by Bailout Mania back in November of 2008. What do people do when they’re scared about the state of the economy? They. Stop. Spending.

Supporters of bailouts and “stimuli” imagine that they can overcome consumers’ tight-fistedness in the short term, but they fail to realize that each new lavish increase in federal spending makes taxpayers more nervous about their ability to repay the ballooning federal debt and about the future of the U.S. economy. So while the Bridge to Your Wallet may have created a handful of local construction jobs in Missouri, it is almost certainly costing many others around the nation.

Cautious taxpayers look at that bridge project, at the mind-boggling accumulation of federal bailouts and stimuli and the biggest federal budget in history, and they cancel major purchases and family vacations. They eat at home instead of supporting their local restaurants. They do exactly the opposite of what the president and Congress are expecting.

If the media insist on doing more stories about the Bridge to Your Wallet, they should look at the polling and spending data showing how Washington’s spending spree is scaring the public into spending less — defeating the very purpose of the stimulus. They should interview restaurant and hotel owners and ask them just how economically stimulated they feel at the moment.

March 5 (Bloomberg) -- The Federal Reserve Board of Governors receives daily reports on loans to banks and securities firms, the institution said in response to a Freedom of Information Act lawsuit filed by Bloomberg News.

The Fed refused yesterday to disclose the names of the borrowers and the loans, alleging that it would cast “a stigma” on recipients of more than $1.9 trillion of emergency credit from U.S. taxpayers and the assets the central bank is accepting as collateral.

The bank provides “select members and staff of the Board of Governors with daily and weekly reports” on Primary Dealer Credit Facility borrowing, said Susan E. McLaughlin, a senior vice president in the markets group of the Federal Reserve Bank of New York in a deposition. The documents “include the names of the primary dealers that have borrowed from the PDCF, individual loan amounts, composition of securities pledged and rates for specific loans.”

The Board of Governors contends that it’s separate from its member banks, including the Federal Reserve Bank of New York which runs the lending programs. Most documents relevant to the Bloomberg suit are at the Federal Reserve Bank of New York, which isn’t subject to FOIA law, according to the Fed. The Board of Governors has 231 pages of documents, which it is denying access to under an exemption under trade secrets.

“I would assume that information would be shared by the Fed and the New York Fed,” said U.S. Representative Scott Garrett, a New Jersey Republican. “At some point, the demand for transparency is paramount to any demand that they have for secrecy.”

‘Financial Crisis’

Bloomberg sued Nov. 7 under the U.S. Freedom of Information Act, requesting details about the terms of 11 Fed lending programs.

The Bloomberg lawsuit said the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”

The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP.

Total Fed lending exceeded $2 trillion for the first time Nov. 6 after rising by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA. Fed lending as of Feb. 25 was $1.92 billion.

Commercial, Consumer Loans

On Feb. 23, the Fed disclosed a breakdown by broad categories for $1.81 trillion of collateral pledged by banks and bond dealers as of Dec. 17 after Congress demanded more transparency from the central bank.

The largest portions of collateral being held by the Fed at that time were $456 billion in commercial loans, $203 billion in consumer loans and $159 billion in residential mortgages, according to the central bank’s Web site. It didn’t identify any loans or provide their credit ratings and said it will update the figures about every two months.

Government loans, spending or guarantees to rescue the country’s financial system total more than $11.7 trillion since the international credit crisis began in August 2007, according to data compiled by Bloomberg. In return, banks left collateral with the central bank that effectively acts as a credit line that lenders can draw on without posting additional assets.

Bank Opposition

Bloomberg News, a unit of New York-based Bloomberg LP, on May 21 asked the Fed to provide data on collateral posted from April 4 to May 20. The central bank said June 19 that it needed until July 3 to search documents and determine whether it would make them public. Bloomberg didn’t receive a formal response that would let it file an appeal within the legal time limit.

On Oct. 25, Bloomberg filed another request, expanding the range of when the collateral was posted. It sued Nov. 7.

In response to Bloomberg’s request, the Fed said the U.S. is facing “an unprecedented crisis” in which “loss in confidence in and between financial institutions can occur with lightning speed and devastating effects.”

Fed Chairman Ben S. Bernanke and then Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system.

The Freedom of Information Act obliges federal agencies to make government documents available to the press and public. The Bloomberg lawsuit, filed in New York, doesn’t seek money damages.

Banks oppose any release of information because that might signal weakness and spur short-selling or a run by depositors, the Fed argued in its response.

“You could make everything a trade secret,” said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press.

The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

The U.S. Financial System Is Effectively InsolventNouriel Roubini 03.05.09, 12:01 AM ET

For those who argue that the rate of growth of economic activity is turning positive--that economies are contracting but at a slower rate than in the fourth quarter of 2008--the latest data don't confirm this relative optimism. In 2008's fourth quarter, gross domestic product fell by about 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the U.S.

There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession. Here's why:

First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the U.S. and China. Some signals that the second derivative was turning positive for the U.S. and China turned out to be fake starts. For the U.S., the Empire State and Philly Fed indexes of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels, suggesting accelerating job losses; and January's sales increase is a fluke--more of a rebound from a very depressed December, after aggressive post-holiday sales, than a sustainable recovery.

For China, the growth of credit is only driven by firms borrowing cheap to invest in higher-returning deposits, not to invest, and steel prices in China have resumed their sharp fall. The more scary data are those for trade flows in Asia, with exports falling by about 40% to 50% in Japan, Taiwan and Korea.

Even correcting for the effect of the Chinese New Year, exports and imports are sharply down in China, with imports falling (-40%) more than exports. This is a scary signal, as Chinese imports are mostly raw materials and intermediate inputs. So while Chinese exports have fallen so far less than in the rest of Asia, they may fall much more sharply in the months ahead, as signaled by the free fall in imports.

With economic activity contracting in 2009's first quarter at the same rate as in 2008's fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe.

Fiscal and monetary stimulus is becoming more aggressive in the U.S. and China, and less so in the euro zone and Japan, where policymakers are frozen and behind the curve. But such stimulus is unlikely to lead to a sustained economic recovery. Monetary easing--even unorthodox--is like pushing on a string when (1) the problems of the economy are of insolvency/credit rather than just illiquidity; (2) there is a global glut of capacity (housing, autos and consumer durables and massive excess capacity, because of years of overinvestment by China, Asia and other emerging markets), while strapped firms and households don't react to lower interest rates, as it takes years to work out this glut; (3) deflation keeps real policy rates high and rising while nominal policy rates are close to zero; and (4) high yield spreads are still 2,000 basis points relative to safe Treasuries in spite of zero policy rates.

Fiscal policy in the U.S. and China also has its limits. Of the $800 billion of the U.S. fiscal stimulus, only $200 billion will be spent in 2009, with most of it being backloaded to 2010 and later. And of this $200 billion, half is tax cuts that will be mostly saved rather than spent, as households are worried about jobs and paying their credit card and mortgage bills. (Of last year's $100 billion tax cut, only 30% was spent and the rest saved.)

Thus, given the collapse of five out of six components of aggregate demand (consumption, residential investment, capital expenditure in the corporate sector, business inventories and exports), the stimulus from government spending will be puny this year.

Chinese fiscal stimulus will also provide much less bang for the headline buck ($480 billion). For one thing, you have an economy radically dependent on trade: a trade surplus of 12% of GDP, exports above 40% of GDP, and most investment (that is almost 50% of GDP) going to the production of more capacity/machinery to produce more exportable goods. The rest of investment is in residential construction (now falling sharply following the bursting of the Chinese housing bubble) and infrastructure investment (the only component of investment that is rising).

With massive excess capacity in the industrial/manufacturing sector and thousands of firms shutting down, why would private and state-owned firms invest more, even if interest rates are lower and credit is cheaper? Forcing state-owned banks and firms to, respectively, lend and spend/invest more will only increase the size of nonperforming loans and the amount of excess capacity. And with most economic activity and fiscal stimulus being capital- rather than labor-intensive, the drag on job creation will continue.

So without a recovery in the U.S. and global economy, there cannot be a sustainable recovery of Chinese growth. And with the U.S, recovery requiring lower consumption, higher private savings and lower trade deficits, a U.S. recovery requires China's and other surplus countries' (Japan, Germany, etc.) growth to depend more on domestic demand and less on net exports. But domestic-demand growth is anemic in surplus countries for cyclical and structural reasons. So a recovery of the global economy cannot occur without a rapid and orderly adjustment of global current account imbalances.

Meanwhile, the adjustment of U.S. consumption and savings is continuing. The January personal spending numbers were up for one month (a temporary fluke driven by transient factors), and personal savings were up to 5%. But that increase in savings is only illusory. There is a difference between the national income account (NIA) definition of household savings (disposable income minus consumption spending) and the economic definitions of savings as the change in wealth/net worth: savings as the change in wealth is equal to the NIA definition of savings plus capital gains/losses on the value of existing wealth (financial assets and real assets such as housing wealth).

In the years when stock markets and home values were going up, the apologists for the sharp rise in consumption and measured fall in savings were arguing that the measured savings were distorted downward by failing to account for the change in net worth due to the rise in home prices and the stock markets.

But now with stock prices down over 50% from peak and home prices down 25% from peak (and still to fall another 20%), the destruction of household net worth has become dramatic. Thus, correcting for the fall in net worth, personal savings is not 5%, as the official NIA definition suggests, but rather sharply negative.

In other terms, given the massive destruction of household wealth/net worth since 2006-07, the NIA measure of savings will have to increase much more sharply than has currently occurred to restore households' severely damaged balance sheets. Thus, the contraction of real consumption will have to continue for years to come before the adjustment is completed.

In the meanwhile the Dow Jones industrial average is down today below 7,000, and U.S. equity indexes are 20% down from the beginning of the year. I argued in early January that the 25% stock market rally from late November to the year's end was another bear market suckers' rally that would fizzle out completely once an onslaught of worse than expected macro and earnings news, and worse than expected financial shocks, occurs. And the same factors will put further downward pressures on U.S. and global equities for the rest of the year, as the recession will continue into 2010, if not longer (a rising risk of an L-shaped near-depression).

Of course, you cannot rule out another bear market suckers' rally in 2009, most likely in the second or third quarters. The drivers of this rally will be the improvement in second derivatives of economic growth and activity in the U.S. and China that the policy stimulus will provide on a temporary basis. But after the effects of a tax cut fizzle out in late summer, and after the shovel-ready infrastructure projects are done, the policy stimulus will slacken by the fourth quarter, as most infrastructure projects take years to be started, let alone finished.

Similarly in China, the fiscal stimulus will provide a fake boost to non-tradable productive activities while the traded sector and manufacturing continue to contract. But given the severity of macro, household, financial-firm and corporate imbalances in the U.S. and around the world, this second- or third-quarter suckers' market rally will fizzle out later in the year, like the previous five ones in the last 12 months.

In the meantime, the massacre in financial markets and among financial firms is continuing. The debate on "bank nationalization" is borderline surreal, with the U.S. government having already committed--between guarantees, investment, recapitalization and liquidity provision--about $9 trillion of government financial resources to the financial system (and having already spent $2 trillion of this staggering $9 trillion figure).

Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.

But even in this case, the distinction is only between partial nationalization and full nationalization: With 36% (and soon to be larger) ownership of Citi, the U.S. government is already the largest shareholder there. So what is the non-sense about not nationalizing banks? Citi is already effectively partially nationalized; the only issue is whether it should be fully nationalized.

Ditto for AIG, which lost $62 billion in the fourth quarter and $99 billion in all of 2008 and is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.

Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.

News and banks analysts' reports suggested that Goldman Sachs got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)

But some things are known: Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.

So for the Treasury to hide behind the "systemic risk" excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.

And even with the $2 trillion of government support, most of these financial institutions are insolvent, as delinquency and charge-off rates are now rising at a rate--given the macro outlook--that means expected credit losses for U.S. financial firms will peak at $3.6 trillion. So, in simple words, the U.S. financial system is effectively insolvent.

Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.

Fiscal Double DippingDemocrats have embarked on an irresponsible spending bonanza.

By Veronique de Rugy & Alex Bright

President Barack Obama promises to cut the federal deficit in half by 2013. He also promises that appropriations bills will be free of earmarks during his presidency. These claims are belied by the omnibus spending bill that Democrats are trying to rush through Congress. The bill is larded with pork and would significantly increase fiscal year 2009 spending, and by funding agencies that just received a major boost from the stimulus bill.

The omnibus package is made of nine appropriations bills left over from last year. In September 2008, Pres. George W. Bush signed into law the only three appropriations bill — totaling $600 billion in spending — completed at the time: Defense, Homeland Security, and Veteran Affairs. Congress faces a tight time frame for getting the omnibus to Pres. Obama’s desk, since the agencies covered by the measure are being funded at last year’s levels through March 6.

The omnibus would provide $410 billion in discretionary spending. That’s $31 billion (or 8 percent) more than the amount contained in the FY2008 versions of these nine appropriations bills, and it’s $19 billion more than Pres. Bush requested for FY2009. Agriculture is scheduled to get $20 billion in spending — $2 billion more than Bush’s request — after getting $26 billion from the stimulus. In fact, according to Sen. Tom Coburn (R., Okla.), if the omnibus bill goes through, most federal agencies would get a 50 percent to 80 percent funding boost between 2009 and 2010, if you include the stimulus funds.

Hundreds of groups — including the Association of Community Organizations for Reform Now (ACORN) and the National Education Association (NEA) — that have already received billions of tax dollars from the stimulus plan will get another serving from the omnibus spending bill. Also, thanks to the $1 billion in stimulus funding and another $3.9 billion in the omnibus, the Census Bureau’s budget for 2009 will nearly triple over last year. The National Endowment for the Arts will receive a 57 percent funding increase over FY2008 thanks to $50 million in the stimulus and another $138 million in the omnibus. And Amtrak will see its funding double in FY2009 after receiving $850 million from the stimulus and another $940 million from the omnibus.

How can President Obama justify this fiscal double dipping? Didn’t he campaign on a promise to reduce earmarks? Taxpayers for Common Sense (TCS), a nonpartisan watchdog organization that tracks pork, found 8,570 earmarks worth $7.7 billion in the proposed omnibus bill. Adding those to the $6.6 billion in earmarks passed last fall, TSC calculates a total of $14.3 billion in pork appropriated for FY2009 — a mere $500 million less than the year before.

Some of the earmarks include $713,625 for woody biomass at SUNY College of Environmental Science and Forestry; $951,500 for “Sustainable Las Vegas”; $24,000 for the “A+ for Abstinence” program; $300,000 for the Montana World Trade Center; $950,000 for the Myrtle Beach International Trade and Convention Center; $200,000 for the Oil Region Alliance; $190,000 for the Buffalo Bill Historical Center in Cody, Wyo., for digitizing and editing the Cody collection; and $143,000 for the Las Vegas Natural History Museum, to expand natural-history education programs.

Interestingly, according to a Congressional Quarterly story published on February 26, “President Obama, who took a no-earmark pledge on the campaign trail, is listed as one of dozens of cosponsors of a $7.7 million set-aside in the fiscal 2009 omnibus spending bill passed by the House on Wednesday.” The earmark is for vocational training at two schools run by American Indian groups in New Mexico and North Dakota. Shortly after the news broke, Senate Appropriations Committee spokesman Rob Blumenthal said that Obama’s name would be removed from future versions of the congressional report identifying earmarks and their sponsors.

Obviously, U.S. lawmakers’ love for pork was not altered by the economic crisis. An amendment introduced by Sen. John McCain to get rid of earmarks was easily defeated, and Sen. Coburn was told that he couldn’t introduce additional amendments. Democrats even told the president not to bother asking them to cut earmarks out the bill because they wouldn’t.

We are in the midst of a serious crisis, and yet Congress and the president have embarked on an irresponsible spending bonanza. The only question is, How much are they willing to put on our children’s tab?

— Veronique de Rugy is an economist at the Mercatus Center at George Mason University, where Alex Bright is a program associate.

Obama's Radicalism Is Killing the DowA financial crisis is the worst time to change the foundations of American capitalism.

By MICHAEL J. BOSKIN

It's hard not to see the continued sell-off on Wall Street and the growing fear on Main Street as a product, at least in part, of the realization that our new president's policies are designed to radically re-engineer the market-based U.S. economy, not just mitigate the recession and financial crisis.

Martin KozlowskiThe illusion that Barack Obama will lead from the economic center has quickly come to an end. Instead of combining the best policies of past Democratic presidents -- John Kennedy on taxes, Bill Clinton on welfare reform and a balanced budget, for instance -- President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown.

Mr. Obama's $3.6 trillion budget blueprint, by his own admission, redefines the role of government in our economy and society. The budget more than doubles the national debt held by the public, adding more to the debt than all previous presidents -- from George Washington to George W. Bush -- combined. It reduces defense spending to a level not sustained since the dangerous days before World War II, while increasing nondefense spending (relative to GDP) to the highest level in U.S. history. And it would raise taxes to historically high levels (again, relative to GDP). And all of this before addressing the impending explosion in Social Security and Medicare costs.

To be fair, specific parts of the president's budget are admirable and deserve support: increased means-testing in agriculture and medical payments; permanent indexing of the alternative minimum tax and other tax reductions; recognizing the need for further financial rescue and likely losses thereon; and bringing spending into the budget that was previously in supplemental appropriations, such as funding for the wars in Iraq and Afghanistan.

The specific problems, however, far outweigh the positives. First are the quite optimistic forecasts, despite the higher taxes and government micromanagement that will harm the economy. The budget projects a much shallower recession and stronger recovery than private forecasters or the nonpartisan Congressional Budget Office are projecting. It implies a vast amount of additional spending and higher taxes, above and beyond even these record levels. For example, it calls for a down payment on universal health care, with the additional "resources" needed "TBD" (to be determined).

Mr. Obama has bravely said he will deal with the projected deficits in Medicare and Social Security. While reform of these programs is vital, the president has shown little interest in reining in the growth of real spending per beneficiary, and he has rejected increasing the retirement age. Instead, he's proposed additional taxes on earnings above the current payroll tax cap of $106,800 -- a bad policy that would raise marginal tax rates still further and barely dent the long-run deficit.

Increasing the top tax rates on earnings to 39.6% and on capital gains and dividends to 20% will reduce incentives for our most productive citizens and small businesses to work, save and invest -- with effective rates higher still because of restrictions on itemized deductions and raising the Social Security cap. As every economics student learns, high marginal rates distort economic decisions, the damage from which rises with the square of the rates (doubling the rates quadruples the harm). The president claims he is only hitting 2% of the population, but many more will at some point be in these brackets.

As for energy policy, the president's cap-and-trade plan for CO2 would ensnare a vast network of covered sources, opening up countless opportunities for political manipulation, bureaucracy, or worse. It would likely exacerbate volatility in energy prices, as permit prices soar in booms and collapse in busts. The European emissions trading system has been a dismal failure. A direct, transparent carbon tax would be far better.

Moreover, the president's energy proposals radically underestimate the time frame for bringing alternatives plausibly to scale. His own Energy Department estimates we will need a lot more oil and gas in the meantime, necessitating $11 trillion in capital investment to avoid permanently higher prices.

The president proposes a large defense drawdown to pay for exploding nondefense outlays -- similar to those of Presidents Carter and Clinton -- which were widely perceived by both Republicans and Democrats as having gone too far, leaving large holes in our military. We paid a high price for those mistakes and should not repeat them.

The president's proposed limitations on the value of itemized deductions for those in the top tax brackets would clobber itemized charitable contributions, half of which are by those at the top. This change effectively increases the cost to the donor by roughly 20% (to just over 72 cents from 60 cents per dollar donated). Estimates of the responsiveness of giving to after-tax prices range from a bit above to a little below proportionate, so reductions in giving will be large and permanent, even after the recession ends and the financial markets rebound.

A similar effect will exacerbate tax flight from states like California and New York, which rely on steeply progressive income taxes collecting a large fraction of revenue from a small fraction of their residents. This attack on decentralization permeates the budget -- e.g., killing the private fee-for-service Medicare option -- and will curtail the experimentation, innovation and competition that provide a road map to greater effectiveness.

The pervasive government subsidies and mandates -- in health, pharmaceuticals, energy and the like -- will do a poor job of picking winners and losers (ask the Japanese or Europeans) and will be difficult to unwind as recipients lobby for continuation and expansion. Expanding the scale and scope of government largess means that more and more of our best entrepreneurs, managers and workers will spend their time and talent chasing handouts subject to bureaucratic diktats, not the marketplace needs and wants of consumers.

Our competitors have lower corporate tax rates and tax only domestic earnings, yet the budget seeks to restrict deferral of taxes on overseas earnings, arguing it drives jobs overseas. But the academic research (most notably by Mihir Desai, C. Fritz Foley and James Hines Jr.) reveals the opposite: American firms' overseas investments strengthen their domestic operations and employee compensation.

New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government.

From the poorly designed stimulus bill and vague new financial rescue plan, to the enormous expansion of government spending, taxes and debt somehow permanently strengthening economic growth, the assumptions underlying the president's economic program seem bereft of rigorous analysis and a careful reading of history.

Unfortunately, our history suggests new government programs, however noble the intent, more often wind up delivering less, more slowly, at far higher cost than projected, with potentially damaging unintended consequences. The most recent case, of course, was the government's meddling in the housing market to bring home ownership to low-income families, which became a prime cause of the current economic and financial disaster.

On the growth effects of a large expansion of government, the European social welfare states present a window on our potential future: standards of living permanently 30% lower than ours. Rounding off perceived rough edges of our economic system may well be called for, but a major, perhaps irreversible, step toward a European-style social welfare state with its concomitant long-run economic stagnation is not.

Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.

Why the Aussies could have predicted Geithner’s incompetenceposted at 5:12 pm on March 6, 2009 by Ed Morrissey

Remember when the Obama administration and its allies in Congress urged the confirmation of Tim Geithner despite his tax problems? They claimed that Geithner was “uniquely qualified” to lead the nation out of an economic collapse, and that no other candidate could possibly replace Geithner. Former Australian prime minister Paul Keating must have thought the Democrats and American media had discovered a completely different Tim Geithner than the one he knew:

If anyone in the US media had thought to ask a former Australian prime minister for his assessment, they would have heard a different view. And they would not have been so surprised at Geithner’s performance since.

In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner’s record in handling the Asian crisis: “Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.”

In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.

In fact, Geithner bungled the job so badly that Asian nations still refuse to “stick their head in the IMF noose,” as Keating puts it. Despite 7% compound growth over several years afterwards, Indonesia still couldn’t get itself out of the hole Geithner dug for them. Soeharto lost power, and countries like China paid attention. Instead of working more cooperatively, China built up big reserves instead, creating a debt imbalance that helped make the current financial crisis much worse than it might have been.

Geithner’s performance since his confirmation hasn’t surprised Keating at all. The dithering on bank issues has left the US with few realistic options outside of nationalization on some scale. The vacillation and fumbled rollouts of economic policy have left the markets with no confidence at all in his leadership, leading to a flight from capital investment clearly shown in the stock market performance of the last few weeks. Keating understands that lack of confidence from his own experiences with Geithner, but the US has just begun to figure out Geithner’s incompetence.

That sound you hear from down under? Laughter at the gullibility of Congress and the media in buying the argument that a man who couldn’t figure out his own taxes had the only qualifications for handling American economic policy. Our mainstream media never reported on this botch-up until it was far too late to do anything about it.

Banana Republic, U.S.ABy Thomas E. Woods, Jr. Barack Obama is already making the Clinton and Bush years seem like the good old days.

Close to a trillion dollars are being tossed around in a "stimulus" package that no one in his right mind-and I do not here include the mainstream of the economics profession, which has disgraced itself in this crisis-expects to bring about recovery. Economist Robert Wenzel rightly describes the stimulus as "just the insiders raiding the till while there is still money in it." Trillions of dollars are likewise being thrown at financial institutions that (if we actually believe in the free market) richly deserve to go bankrupt. Nationalization of the banks is being openly discussed-an outcome our rulers assure us they would undertake only as a last resort, deploring every minute of it, and only for our own good.

We are learning what it is like to live in an Orwell novel. Our television screens are filled with people offering choices between idiotic and suicidal option A and idiotic and suicidal option B. We are being told that we must at least partially nationalize our banks, prop up zombie companies, lower interest rates to zero, and pass stimulus packages in order to escape the fate of Japan-which, um, partially nationalized its banks, propped up zombie companies, lowered interest rates to zero, and passed eight stimulus packages. We have a president who tells us we cannot rely on the free market to get us out of this mess because the free market is what got us here, as if the Federal Reserve and its bubble-inducing monetary policy never existed.

F. A. Hayek won the Nobel Prize in 1974 for showing how central bank manipulation of interest rates gives rise to the kind of boom-bust cycle we are experiencing now, and that such phenomena are not caused by the unhampered market. If by some miracle you manage to hear this point of view on television, it will be sandwiched between hours and hours of Keynesian droning.

Of course, the rationale we're being given for the insanity is that these are crisis times, and the usual rules go out the window. That's what Paul Krugman means when he speaks of "depression economics"-a special set of economic principles come into play in times like this that differ radically from those we would abide by under normal conditions. And so we see once again why Keynesian economics swept the board so successfully: it tells the regime just what it wants to hear. It provides intellectual cover for the expansion of government power and the seizure of private property that state officials want to engage in anyway.

"Never allow a crisis to go to waste," said chief of staff and former Freddie Mac board member Rahm Emmanuel. He needn't worry. The Keynesian economists who suddenly dominate public life in America, years after everyone else assumed Keynes and his fallacies were long dead and buried, will weave every apologia under the sun for whatever activity Emmanuel and the president he serves choose to undertake. The all-purpose pretext is ready at hand: why, we've got to do something about this terrible crisis.

Indeed we should do something-but, as usual, it's exactly the opposite of what the federal government intends to do. We should cut the government's budget as drastically as possible, thereby releasing resources for use by the productive sector. (That worked pretty well in stopping the terrible depression of 1920-21.) We should stop the Fed from interfering in the recovery process. We should let the private economy sort out which activities undertaken during the artificial Greenspan boom are genuine wealth-generating activities and which are wealth-destroying bubble activities. The latter should be promptly liquidated so their resources can be better employed by the former.

Meanwhile, we still have some conservatives, frozen in the 1980s, calling for reductions in marginal income tax rates, among other feckless suggestions. Tax reductions are desirable, to be sure, but the crisis we are facing is a systemic one that is not going to be fixed by marginal changes here and there. We need to start talking big changes. We need to open up questions the regime has long since considered closed. We need to talk about the monetary system, the Fed, entitlements, and much else.

In other words, if the Left can advocate $1 trillion-plus annual deficits as far as the eye can see, why can't supporters of the free market be equally bold in the opposite direction?

Conservatives' rediscovery of government frugality has been a refreshing thing to behold. The important thing now is for conservative intellectuals to be sure they know sound economics. For instance, the problem with the stimulus package isn't the "pork," however evil, stupid, and counterproductive it surely is. The problem is the Keynesian nonsense on which the very idea of "fiscal stimulus" is based. The problem is the mistaken view that "spending" is what the economy needs now, and that all our efforts must be expended on ways to revive consumer spending and borrowing.

The president has unveiled a program to help troubled homeowners make their mortgage payments and stay in their homes. He is going to encounter the same problem Charles Murray identified in the mid-1980s in his book Losing Ground: American Social Policy 1950-1980. There Murray famously argued that poverty persisted in the United States not in spite of anti-poverty programs, but because of them. Before evaluating the empirical evidence, though, Murray first explained why, from a theoretical point of view, we should in fact expect this perhaps counterintuitive result.

Murray challenged his readers to devise a social program that would not cause net harm. He gave the example of a government program aimed at discouraging smoking. I can't reproduce his whole argument here, which is quite lengthy, but his point is that the reward the government offers for people who quit has to be substantial enough to persuade them to go to the trouble of quitting, but not so substantial as to encourage nonsmokers to start smoking. Just as Murray says, this task turns out to be borderline impossible. It is especially difficult when the program in question makes it more desirable to be out of work. Given man's inclination to acquire wealth with the least possible exertion, such programs threaten to drag additional people into a cycle of dependency that mankind's inclination to sloth will only reinforce over time.

For similar reasons, every attempt to solve the problems caused by a housing bubble that the Fed should not have blown up in the first place, such as the proposed measures for mortgage relief, will exacerbate the problems, thereby leading to still more government intervention, in the very pattern Ludwig von Mises identified in his famous essay "Middle-of-the-Road Policy Leads to Socialism." That is the fallacy in the usual statement that "it would cost only $X billion to give every American who needs it" this or that benefit. Once people realize the government is giving out a benefit for free, more and more people will place themselves in the condition that entitles them to the benefit, thereby making the program ever more expensive.

The best outcome I can see is that under Obama the United States will experience the kind of economic stagnation that is now routine in Western Europe, with high unemployment and sluggish (if any) growth, and people standing around pretending not to know what could be causing it. A smaller and smaller core of productive firms and individuals will be expected to support a larger and larger demand for bailouts and other corporate and individual welfare. Who is John Galt, indeed.

The worst outcome, which we cannot dismiss out of hand, is a hyperinflationary destruction of the currency or, barring that, the reduction of America to banana-republic conditions.

Regardless of which of these outcomes actually occurs, the Obama administration will have moved the country farther away from a market economy than it has ever been in peacetime (barring perhaps the early years of the New Deal and its outright cartelization of industry), accelerating trends already at work under the Bush administration. If you want to succeed in the so-called private sector, you had better have some friends in Washington, because that's where credit and capital will be allocated from.

And if you want to hold on to your wealth, assume the dollar is going to collapse. The euro is under terrific strain right now, and so the dollar may continue its artificial rally in the near term, but in light of the accelerating demands of the predatory sector (that is, the government) on the shrinking productive sector, the dollar's bust has to come. The printing press will be the regime's only way out. If this crisis doesn't do it, the looming entitlement disaster will finish off the dollar. How else are $70 trillion in entitlement liabilities going to be paid for? Floating a few more bonds?

Things could get very bad indeed. If we are to have any chance of beating back these unprecedented incursions of the state, supporters of the free market need to know their position cold. I wrote my just-released book Meltdown for this reason: to educate Americans about the causes of the crisis, to be sure, but also to give supporters of the free market the ammunition they need to make their case effectively.

Even that may prove not to be enough. We may have to be consoled with the knowledge that at least we fought with all our strength. And fight we must, as Ludwig von Mises urged: "No one can find a safe way out for himself if society is sweeping toward destruction. Therefore, everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interest of everyone hangs on the result."

Thomas E. Woods, Jr. is senior fellow in American history at the Ludwig von Mises Institute. He is the author of nine books, including two New York Times bestsellers: The Politically Incorrect Guide to American History and the just-released Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse.

First time I've encountered this site. It cites Paul Krugman approvingly, who I loathe, and has a somewhat LaRouchie feel, but I'll poke around it some more. An interesting piece:

Confusion, Tunneling, And Lootingwith 80 comments

Emerging market crises are marked by an increase in tunneling - i.e., borderline legal/illegal smuggling of value out of businesses. As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves.

Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt. Confusion helps the powerful, he argued. When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms. The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.

This is the prospect now faced by the United States.

Treasury has made it clear that they will proceed with a “mix-and-match” strategy, as advertized. And people close to the Administration tell me things along the lines of ”it will be messy” and “there is no alternative.” The people involved are convinced - and hold this almost as an unshakeable ideology - that this is the only way to bring private capital into banks.

This attempt to protect shareholders and insiders in large banks is misguided. Not only have these shareholders already been almost completely wiped out by the actions and inactions of the executives and boards in these banks (why haven’t these boards resigned?), but the government’s policy is creating toxic financial institutions that no one wants to touch either with equity investments or - increasingly - further credit.

Policy confusion is rampant. Did the government effectively sort-of nationalize Citigroup last Thursday when it said Vikram Pandit will stay on as CEO? If that wasn’t a nationalization moment (i.e., an assertion that the government is now the dominant shareholder), what legal authority does the Treasury have to decide who is and is not running a private company?

Will debtholders be forced to take losses and, if so, how much and for whom? As part of last week’s Citigroup deal, preferred shareholders - whose claims had debt-like characteristics - were pressed into converting to common stock. You may or may not like forced debt-for-equity swaps, but be aware of what the prospect of these will do to the credit market. Junior subordinated Citigroup debt (securities underlying enhanced trust preferred shares) were yesterday yielding 26%.

Who can explain exactly how AIG has lost so much money? Drip-drip injections of government money are not a proper clean-up; there has been no complete recognition of losses and, almost six months later, that company still cannot move on. Time horizons presumably remain short or are getting shorter for all involved. This points to a bleak future more generally.

What do rapidly widening credit default spreads for nonbank financial entities (such as GE Capital and many insurance companies) signify? Is it something about expected behavior by the insiders or by government, or by some combination of both?

Confusion in policy breeds disorder in companies, and disorder leads to the loss of value. This is the reality of severe crises wherever they unfold; we have not yet reached the worst moment. And, of course, there are many more shocks heading our way - mostly from Europe, but also potentially from Asia.

The course of policy is set. For at least the next 18 months, we know what to expect on the banking front. Now Treasury is committed, the leadership in this area will not deviate from a pro-insider policy for large banks; they are not interested in alternative approaches (I’ve asked). The result will be further destruction of the private credit system and more recourse to relatively nontransparent actions by the Federal Reserve, with all the risks that entails.

The road to economic hell is paved with good intentions and bad banks.

1) The proverbial Wall Street capitalists believe that, with new federal income tax rates, the removal of FICA ceilings, increases in capital gains rates, decreases in deductions, and simultaneous tax raises, not only will Obama remove incentives for innovation and productivity, but that he does not seem to care about—or perhaps appreciate—he consequences?

2) On the spending side, investors see too many subsidies and entitlements that may Europeanize the populace and erode incentives, while creating so much debt that in the next decade, should interest rates rise, the federal budget will be consumed with servicing borrowing and entitlement obligations. A redistributive economy in which government ensures an equality of result is Wall Street’s worst nightmare. Debt can only be paid back by floating more foreign debt, issuing more US bonds at home, raising taxes, or printing money—all bad options in the mind of the investor.

3) Too many are beginning to think Obama is, well, a naïf—and hence dangerous. He chest-thumps speeches Geithner cannot deliver. He says we are near the Great Depression—but then, after the stimulus package passes, suddenly hypes future growth rates to suggest that we will be out a recession, soon after all? Add in all the talk of high-tax, Al-Gorist cap-in-trade, wind and solar, socialized medicine in the midst of a financial crisis, and at best Obama comes across as confused and herky-jerky, and at worse, clueless on the economy—as if a Chicago organizer is organizing a multi-trillion-dollar economy. Talking about ‘gyrations’ and confusion about profits and earnings, and offering ad hoc advice about investing do not restore authority.

`4) Given the amount of debt the US is incurring (and the decades needed to pay it off), given the loose talk about the ‘rich’, and given the rumors about nationalization, investors are unsure whether the United States will remain a safe haven for investment, or even offer a climate for profit-making, since it would either be taxed to the point of seizure, or its beneficiaries would be culturally and socially demonized. Ultimately perhaps some will accept that as the price of doing business in a socialist US, but for now it creates doubt. This is not a defense of Wall Street (a year ago Richard Fuld and Robert Rubin were our Zeuses on Olympus who strutted like gods), simply a warning that we are going from excess to stasis, and the cure will be as bad as or worse than the disease.

5) Uncertainty. Who is now our Commerce Secretary? Which cowards is the Attorney General talking about? What did Geithner mean about pernicious oil and gas companies? What is with this Solis, and card check? How hard is it to ensure a Richardson or Daschle is clean? In other words, market watchers see after five weeks chaos, and think there is no sure and steady paradigm in which they can make careful business decisions and anticipate with some surety future risk.

So the perfect storm forms, and millions of individuals come to millions of identical conclusions: “Cut your losses with these guys, and get your cash out before it gets worse” rather than “Wow, what bargains! I gotta get in before the window of profit opportunity closes.”

But is there an alternative?

Do Republicans offer an antithesis? Can they explain the Bush deficits and take responsibility for them, as well as the Republican congressional creepiness from 2002-06 (Craig, Stevens, Cunningham, Foley, etc)? And most importantly, will they offer counterproposals—a stimulus much smaller, mixtures of loan guarantees, tax cuts, and (some) public works alone, coupled with spending caps as soon as GDP growth returns? Can they articulate how the market corrected, say, in 1980-3, without our government going socialist? Can we get a plan not merely to balance the budget, but to pay off the debt? If not, legitimate criticisms of Obama fall on deaf ears without some positive alternative.

Obamania

The rants of Sec. Geithner about oil and gas companies and global warming were quite unusual. Does he grasp that the transition to his solar and wind nirvana requires some rather tough hombres working tonight on rigs in the Gulf, and some brave engineers driving a Jeep in a Libya or out in the Kuwaiti desert looking for more oil, or some poor fellow freezing out in the Arctic Circle so that Mr. Geithner can be driven in his government limo to the hearings? Solar panels do not power the President’s chopper—yet. And Hillary flew to the Middle East on fossil fuel engines not via clipper ship.

Meanwhile, note that the campaign flip-flop positions of supporting off-shore drilling, nuclear, shale oil, and coal, are now insidiously back to the original positions of ‘no—maybe’.

The Utopian Ranters

Energy Secretary Chu ranted that we warmed up the planet so Californians must the pay the price by seeing their farms dry up and blow away. Attorney General finger pointed and labeled us “cowards.” So why the attack on oil companies by Geithner—and why these lectures about our supposed racism and environmental crimes? What deep psychological need does it fulfill for a Holder, our first African-American AG, to blast us as cowardly racists, or why does an elite like Geithner think fossil fuels are not the linchpin that our economy still for a bit hinges upon? They all need to go back to work, ensure the debt is paid down, and quiet down the Harvard Yard sermons.

The Worst of Both Worlds

There is much talk about Obama merely returning to the tax rates of the Clinton administration. But that is misleading for two unfortunate reasons: (1) Clinton did not tamper with FICA ceilings and other deductions in addition to the income tax hikes; (2) he had spending limits imposed by the post 1994-Congress, so at least his income tax increases led to a balanced budget. But Obama is not only raising taxes far higher in aggregate than did Clinton with the present trillion-some spending hikes, but ensuring that we will still end up with astronomical deficits. So we get the tax hikes of Clinton—but without the balanced budgets; and we get far higher deficits than under Bush—but sans the tax cuts.

Fear of Government–Part Two.

Last week I wrote of my encounters with municipal garbage trucks spewing garbage, and city bus drivers doing rolling stops into the cross walk, one hand with cigarette, one hand with cell phone—as a reflection of the old Roman worry “Who will police the police?”

In a world of government employees there is no real redress of grievances, but real difficulty of accountability (what government employee fines the government-employed bus driver for violating state law concerning driving while on a cell phone?). My latest example was Thursday afternoon.

As I drove out of the parking lot of the San Jose parking lot, of the six exit pay stations, only one was open. But at the window, a city tractor and a city pick-up were parked and idled blocking the exit. The drivers were both out and talking to the parking attendant about their “lost” ticket. After watching them all nonchalantly talk—joined by the other parking attendant with his booth closed on “break”—I got out and asked the four ‘what’s up’?

You know what followed—abuse, yelling, ‘how dare you question us!’, etc. A number of backed-up drivers like me now got out and were yelling back, and finally the city employees moved through and unblocked the exit while the idle attendant ran back to open a second station to handle the irate idling cars. Total elapsed time? 24 minutes of waiting. Imagine four employees blocking the only way out the San Jose parking lot, while cars line up, their drivers watching the four josh around and apparently laugh at the fee-paying customers.

I had nightmares that this is what the new 40% government GDP USA will look like by 2012—$20 trillion now in aggregate debt to ensure a nation of city-employees lounging around the toll booth, while cars line up and drivers cool their heels. No success, no failure, no stress, no calm—just endless existence.

There has been a lack of clarity about what got us into this mess and what should have been the way out now. Gilder is at his best on economics IMO, not stock picking...

GEORGE GILDER, Featured in "TheClaremont Review": In the current financial and political circus, withFabian fantasists and climate cranks in control of economic policy, themainstream media join Ivy League sages in condemning Adam Smith’sinvisible hand. Free market ideology has blinded conservatives, say manysophisticates, to a crime wave on Wall Street, as Adam Smith gives way toBernie Madoff as the epitome of capitalism.

For perspective on what is going on, however, we should contemplate theview of Richard Armey, the crusty cowboy who long served as Republicanmajority leader and economic guru in the House, who pointed out to me moreyears ago than I want to recall, that economics has more hands and feet,visible and invisible, than the media imagines. Confounding the market’sinvisible hand during the past decade’s financial follies were thegovernment’s very visible handouts. These outlays massively andconspicuously supported popular causes and constituents: low incomemortgage seekers, affirmative action litigators, failed farmers, USautomakers, ethanol junkies, sugar beet shysters, hustlers of solar powerand windmills, socialist educators, climate cranks, and other altruisticbut addled government dependents, plus all the interventionist CRAP(Community Reinvestment Act programs) that mandated the suspension ofcredit rules for politically favored home buyers. With much of this murkyactivity guaranteed by the government, it prompted orgies of overreach,with the “assets” of Fanny Mae and Freddy Mac rising from a few hundredmillion to five trillion in a decade or so. Democrats fervently celebratedall these visible handouts and wish to expand them hugely.

Meanwhile (in perhaps Armey’s best trope), the invisible foot ofgovernment went to work. This millipedal regulatory force covertly kicksat the underpinnings of private economy activity by capriciouslydebauching the dollar; imposing onerously progressive tax rates onsuccessful economic ventures but making investors eat the losses;fostering anti-business law suits and class action rackets; restrictingaccess to energy resources; snarling international trade; and enactingever more intricate mazes of contradictory laws and regulations with evermore acute moral hazard, which assures that the results of theintervention will be the opposite of its goals. The effect of theserelatively inconspicuous activities is to unleash the visible foot of themarket—all those bankruptcies and foreclosures—and increase demand for thevisible hand of government largesse.

In general, to rectify the situation, the invisible foot of governmentmust be removed—regulations retrenched, tax rates reduced, tariffseliminated, the value of the dollar restored. But instead conservativesfocus most of their energies attacking Leviathan at its strongest and mostpopular point: the visible handouts of government spending—earmarks,subsidies, and such—which matter relatively little if the invisibleassaults are suppressed. Since the visible handouts cannot be reduced in arecession, the only spending cuts that actually happen as a result of theRepublican complaints are in defense.

A few decades ago, supply side economists, such as Arthur Laffer andRobert Mundell and inspired journalists such as Jude Wanniski and SteveForbes pointed out the politically feasible remedy. Lower tax rates andretrenched regulations result in more revenues for the government and lessneed for visible handouts. Because this footloose outcome allows theexpansion of government and the defense of the country while the privatesector grows even more rapidly, it was extremely popular for a few years.Its truth, demonstrated globally (look it up), is incontrovertible. Supplyside policies enable the otherwise impossible combination of guns andbutter: large defense efforts with low tax rates and rapid economicgrowth. Countries with low or declining tax rates can increase theirgovernment spending three times faster than countries with high or risingtax rates, because the low tax countries grow six times faster than thehigh taxers.

Why then is this truth controverted today by all reputable economists?Even the disreputable supply siders seem to concede to the Democrats thatit is possible to increase revenues by increasing tax rates from currentlevels or to sustain social security and medicare without reducing thepayroll tax. The reason is that all economists have been tied to theprocrustean bed of existing national models which exclude all thefactors—economic growth, tax shelters, entrepreneurial innovations,transnational and interstate investment flows and demographicmigrations—that register the supply side effects.

Meanwhile, the profession upholds the phantasmagorical models of demandside economics. Because these models find no confirmation in reality—asJean Baptiste Say proved centuries ago, demand is always and only a sideeffect of real supply—established economic theories are extremelydifficult to learn and remember. You get Nobel prizes for minor andobvious insights in economic geography. Thus the exponents of the standardmodel are deeply threatened by any reality-based economics.

These experts are now completely in control of Washington, attempting tospend their way to political dominance, while taking well over half thevoters off the federal tax rolls and giving actual taxpayers a greaterincentive to hide and shuffle existing wealth than to earn or create newwealth. These measure will retard recovery from the recession and reducerevenues. But globalization means that entrepreneurial creativity—in whichthe United States is increasing it lead—can survive by adopting foreignlocales and resources. Countries such as Israel (a global center ofinnovation) and Ireland (a low tax haven), China (a manufacturing dervish)and India (ascendant in software), are taking the lead and will helpcapitalism survive the Lilliputians currently trying to ruin it in theUnited States. What will matter, after all, is not whether President Obamaapproves of markets but whether markets approve of President Obama, whomay think he has protected his future by buying off the middle class withtax rebates but will soon discover that his future will be decided byglobal markets for currencies and stocks.

To any socialist revival, the invisible hand will still deliver the finalfinger.

George W. Bush, his critics said, was isolated and unaware of how badly things were going in Iraq. He was caught up in a messianic vision to bring democracy to the Middle East. Meanwhile, he stubbornly clung to grandiose domestic policy proposals (e.g., social security reform and immigration reform) when the timing was simply not right. Some of that has been disproved by subsequent events (e.g., we did bring democracy to Iraq) or revelations about his own intimate involvement in reworking a failing Iraq strategy. But the image remained of an isolated and out-of-touch president.

As queasy as it might make us feel, we might consider that we have gone from the frying pan into the fire. Obama does not perceive things are substantially worse or that his “strategy” is failing. He also seems to have the timing terribly off as he discusses an onslaught of taxes and regulation while the economy is staggering. And to make matters worse we have no General Petraeus to help guide us back from the brink of ruin. We have instead Tim Geithner.

In a [1] brilliant posting, small business owner Jim Prevor makes clear that the president is frightfully oblivious to the real world impact of the stock market crash on the lives of ordinary Americans (and hence on our prospects for recovery). Prevor explains:

Every stock market investor quickly learns that the math of markets is forbidding. After all, if stock prices go down by 50 percent, they have to rally by 100 percent to get one back to even.

Yet this doesn’t begin to explain the problem. In political polling, all’s well that ends well. But this is most decidedly not true in the stock market.

If a family needs $25,000 to pay tuition and it sells stocks to raise the money, that money is not available to benefit from any future upswing in market values. So even if Obama orchestrates a miraculous rebound, countless millions of people will have been permanently hurt.

And for individuals and businesses who tried to use prudent margin, Obama seems oblivious to people sitting at their desks desperately trying to navigate not only margin calls but announcements that their brokerage firm has decided the maintenance requirement on certain stocks has been raised and, suddenly, people have to sell anything of quality because they need to raise cash. They get stuck with illiquid portfolios and the selling pressure on anything of quality is immense.

These people and businesses are wiped out, whatever the long term effect of the President’s policies.

And yet the president flicks away the real world news, while his supporters point to poll numbers. That’s right– we have 8.1% unemployment and a stock market crash; they take refuge in a popularity poll more than three and half years before the president would again face the voters. (To its credit the Bush team never boasted about polls numbers or showed much concern when their fortunes changed.) And in their spare time they devise a juvenille plot to attack a radio talk show host.

Rather than ruminating on the worsening economy, Obama is cheered by polls and fixated on redesigning America. The cratering economy doesn’t give him pause. Instead it encourages him to speed up before the voters catch up with him.

And he seems intent on running “victory laps” over the stimulus bill passed weeks ago. Surely [2] campaign-style events touting his handiwork don’t do much to improve the economic outlook going forward. And his cheesy [3] recovery logo only reinforces the sense that he is obsessed with garnering credit, keeping his poll numbers high and reinforcing awareness of government’s growing presence in citizens’ lives. None of this has much to do with improving the climate for job development, economic growth and private sector confidence.

Defenders of the president dismiss the notion that Obama’s policies and rhetoric are in any way responsible for our current plight. It happened on Bush’s watch! Of course it did. But they misstate their opponents’ criticism — another straw man in a growing army of them. The question is not whether Obama caused the recession, but whether he is making it worse. Even the [4] AP spots the fallacy of the Obama administration’s defense: “Although the administration likes to say it ‘inherited’ the recession and trillion-dollar deficits, the economic wreckage has worsened on Obama’s still-young watch.” And it is simply folly to deny that the devastation of wealth in the stock market has made things worse and further unnerved Americans. The stock market crash is the greatest anti-stimulus development of his presidency. Obviously, consumers and homeowners feel even less financially secure than they did when the Dow was 3000 points higher.

[5] Donald Luskin writes:

What will our world look like when President Obama “reforms” health care by nationalizing it given that it represents about one sixth of U.S. economic activity (and the part that’s still working)? What will happen to the cost and availability of electricity when he puts in place a “cap-and-trade” tax on carbon emissions? What will happen to Wall Street when taxes are raised on hedge fund and private-equity managers? What will happen to all of us when all our taxes go up and our deductions go down?

I have a pretty decent idea that none of that will lead to anything good at least not economically. You may disagree. But can’t we at least agree that President Obama is stirring the pot by ramming all these things through now, at a time when he ought to be calming things down so we can all catch our breath and the economy can get back on its feet?

Perhaps if the Treasury Department was fully staffed or if Paul Volker was not apparently banished to an undisclosed location, the president might have a better grip on why his anti-business, anti-wealth-creating policies and rhetoric have sent the markets skidding. Maybe if the national press were less invested in his New Deal II vision, he would confront daily criticisms and aggressive questioning about his schemes. And if he spent more time talking to agitated wealth creators, investors, retirees and middle class parents and less time at photo-ops and campaign-style rallies with handpicked fans, he might internalize what it means to lose half or more of your retirement or college fund.

But on he strides, into the Brave New World of a government-directed economy. (Incidentally, if Tim Geithner is not the best advertisement for limited government I don’t know what is.) And the scariest part of the first six weeks of this administration? The realization that, contrary to his defensive remark in his joint address to Congress, he really doesn’t “get it.”

March 7 (Bloomberg) -- Lloyds Banking Group Plc, Britain's biggest mortgage lender, will cede control to Prime Minister Gordon Brown's government in return for state guarantees covering 260 billion pounds ($367 billion) of risky assets. The government's stake will rise to as much as 75 percent, making Lloyds the fourth U.K. bank to slip into state control since the run on Northern Rock Plc in September 2007. Brown is using that leverage to force banks to increase lending to homeowners and businesses and spur an economy that is facing its worst recession since World War II.

"In order to get British banks lending again the government needed to take them over," said Simon Willis, an analyst at NCB Stockbrokers Ltd. in London, who has a "sell" rating on Lloyds stock. "It is likely to be at least three of four years before the banks return to the private sector."

Lloyds will pay more for asset protection than Royal Bank of Scotland Plc, the first lender to enter the program, because of the deteriorating quality of loans acquired when it bought HBOS Plc in a government-brokered deal. London-based Lloyds will pay 15.6 billion pounds, or 5.2 percent of the insured assets, in the form of non-voting shares, the bank said in a statement. RBS last month paid 2 percent.

About 83 percent of the assets Lloyds is insuring came from HBOS, the bank said.

The HBOS loan book "is more toxic than anyone ever dreamed," said Alan Beaney, who helps manage $2 billion, including Lloyds stock, at Principal Investment Management in Sevenoaks, England. "As a Lloyds shareholder you are very annoyed because you had a bank that did not need the government very much and now you have inherited a rubbish bank." http://www.bloomberg.com/apps/news?pid=20601087&sid=aUuK.B52o350&refer=home

Washington plans for big bank failure

NEW YORK (Fortune) -- The government is bracing for a big bank failure. A bill introduced in Congress would give the FDIC, the agency that stands behind Americans' bank deposits, temporary authority to borrow as much as $500 billion from the government to shore up the deposit insurance fund.

The bill -- the Depositor Protection Act of 2009, backed by Senate Banking Committee Chairman Chris Dodd, D-Conn. and Sen. Mike Crapo, R-Idaho -- wouldn't change the status of individual bank accounts, which through the end of this year are insured up to $250,000.

BEIJING — China served glum markets a dose of optimism on Friday, saying its economy was recovering and promising more swift action to absorb the shock of the global financial crisis and deepening recession in rich nations.

Top Chinese officials said substantial fiscal and monetary stimulus was breathing life back into the world's third-biggest economy hit by crumbling exports, suggesting Beijing saw no need to boost the existing investment plan of nearly $600-billion (U.S.).

“The economic figures are stabilizing and recovering, which demonstrates that the policies have begun to show an impact,” central bank governor Zhou Xiaochuan told a news conference during the National People's Congress.

China's optimism was not expected to be shared by the world's largest economy later on Friday, with forecasters expecting grim numbers when the key U.S. February payrolls report is released.China sees economic recoveryRelated Articles

The Globe and Mail

Mr. Zhou said China had learned the lesson from other countries that a sluggish response to the crisis delayed the restoration of confidence.

“We must err on the side of being quick and decisive.”

Mr. Zhou was speaking a day after Premier Wen Jiabao said China would ramp up deficit spending this year to hit its target of 8 per cent growth, even though he failed to announce an increase to the two-year stimulus plan that financial markets had hoped for.

Beijing's quiet confidence stands in contrast with increasingly gloomy predictions for the United States, the euro zone, Japan, Britain and other industrial nations, all mired in the most severe downturns in decades.

A top International Monetary Fund official said the world's developed economies were suffering the deepest slump since World War Two and warned the downturn could last into next year.

“The emerging consensus is that it looks as if the downturn in the advanced economies will run through this year and into next year,” IMF first deputy managing director John Lipsky told the Daily Mail newspaper in an interview published on Friday.

Jeffrey Lacker, president of the Richmond Federal Reserve and a voting member of the Federal Open Market Committee, sought to dispel the gloom, saying the U.S. economy may join China and start recovering before the end of this year.

Mr. Lacker told CNBC television that the plunge in discretionary spending may have run its course and could “give people some confidence that we've almost seen the worst of it”.

But an onslaught of grim economic data and corporate reports was deepening market pessimism about the U.S. biggest economy.

On Thursday, auditors for General Motors, once the world's top carmaker, voiced doubts whether it could survive without declaring bankruptcy, pushing its shares down more than 15 per cent and Wall Street stocks to 12-year lows.

Asian stocks also fell, unsettled by GM's troubles and lingering fears of more turmoil in the financial sector. Tokyo's Nikkei average closed down 3.5 per cent at a four-month low.

“I'm worried about America and the place where we can place our hopes now is China,” said Yoku Ihara, manager at Retela Crea Securities.

Hopes that China may boost its stimulus plan sparked a brief rally in global stocks earlier this week.

But the latest assurances from Beijing and suggestions that they still had plenty of ammunition to support the economy failed to cheer up investors ahead of the U.S. February payrolls report, the key gauge of the U.S. economy's health.

Economists in a Reuters poll forecast that job losses likely jumped to 648,000 last month, driving the unemployment rate to a 25-year high of 7.9 per cent.

The report comes a day after the European Central Bank and the Bank of England slashed interest rates to record lows to arrest a deepening slide in the European economy.

The BoE also pledged £75-billion ($106-billion) of newly created money to buy government bonds and pump funds into the struggling economy, embarking on an scheme known as quantitative easing.

Unprecedented in Britain, it was tried by Japan with limited success at the beginning of the decade.

In Japan, where the central bank has already driven interest rates close to zero, media reported that the authorities were considering tripling to $30-billion a scheme offering low-interest loans and cash injections to firms in trouble.

BEIJING, March 7 (Xinhua) -- China should speed up reforming its financial system to make the yuan an international currency, said political advisors Saturday. "A significant inspiration to draw from the global financial crisis is that we must play an active role in the reconstruction of the international financial order," said Peter Kwong Ching Woo, chairman of the Hong Kong-based Wharf (Holdings) Limited. The key to financial reform is to make the yuan an international currency, said Woo in a speech to the Second Session of the 11th National Committee of the Chinese People's Political Consultative Conference (CPPCC), the country's top political advisory body. That means using the Chinese currency to settle international trade payments, allowing the yuan freely convertible on the capital account and making it an international reserve currency, he said. China's yuan, or Renminbi, can be freely convertible on the current account but not on the capital account, preventing it from being a reserve currency or a choice in international trade settlement. China has announced trial programs to settle trade in the yuan, a move analysts say will facilitate foreign trade as Chinese exporters might face losses if they continue to be paid in the U.S. dollar. The dollar's exchange rate has become more volatile since the global financial crisis. Economists say the move will increase the acceptance of the currency in Asia, which will help it become an international currency in the long run. The status of the yuan as an international currency will benefit China by giving it a bigger say in world financial issues and reducing the reliance of its huge foreign reserves on the U.S. dollar, some analysts say. Other analysts argue a fully convertible yuan will hurt China as it would allow massive capital outflow during a financial crisis. Meanwhile, Chinese authorities remain cautious. It's possible that the global financial crisis will facilitate the process of making the yuan internationally accepted, but there's no need to push for that, Yi Gang, vice central bank governor, told Xinhua earlier this month. That process should be conducive to all sides, he said. Xu Shanda, former vice director of the State Administration of Taxation and a CPPCC National Committee member, urged for faster paces in making the yuan an international currency as a way of increasing national wealth. He said the United States and the European Union have obtained hefty royalties from the international use of their currencies while China has become the biggest source of that income. A royalty, or seignior age, results from the difference between the cost of printing currency and the face value of the money. "China's loss due to royalty payment has far exceeded the benefit of not making the yuan an international currency," he said in a speech to the annual session of the CPPCC National Committee, without elaborating. China's State Council, or Cabinet, said last December it would allow the yuan to be used for settlement between the country's two economic powerhouses -- Guangdong Province and the Yangtze River Delta -- and the special administrative regions of Hong Kong and Macao. Meanwhile, exporters in Guangxi Zhuang Autonomous Region and Yunnan Province will be allowed to use Renminbi to settle trade payments with ASEAN (Association of Southeast Asian Nations) members.

Mark to Market is one valuable tool to analyze the value of an asset. The rigid accounting of nothing but mark to market on all loans ignores the reality that most families will stay in their home and make the payments un der most circumstances.

We have a long tradition of incompetent regulation. That is not an argument for no regulation nor is it an argument to increase the size or budget of the failed regulators. To me it is an argument to define the role of the federal government down to a manageable, constitutional size and hold regulators to efficiency and performance standards in line with their responsibilities.